Tax Reform Plan Could Increase Taxpayer Costs for Infrastructure Projects

Texas Municipal League
Monday, November 6, 2017

Tax Reform Plan Could Increase Taxpayer Costs for Infrastructure Projects

A preliminary draft of the federal tax reform plan released last week contains provisions that could increase the cost of financing some major municipal infrastructure projects and make it harder for cities to save money by refinancing bonds when interest rates drop, according to the Texas Municipal League.

The proposal would eliminate the tax-exempt status for two specific types of municipal bonds that are used by Texas cities: private activity bonds and advance refunding bonds.  Under current law, investors who purchase these two types of municipal bonds do not pay federal income tax on the interest they receive from the bonds.  Because of this tax-exempt status, cities can get a lower interest rate when they issue the bonds.

“If these proposals become law, the result will be higher costs for capital improvement projects,” said TML Executive Director Bennett Sandlin.  “That means fewer projects will be built or higher taxes to pay for them.”

Private activity bonds can be used to finance projects like airports, solid waste facilities, and affordable housing.  “By scrapping the tax-exempt status of these bonds, the tax reform proposal would make these bonds less attractive to investors and ultimately limit the use of public-private partnerships to build critical infrastructure and create local jobs,” Sandlin said.

Advance refunding bonds are issued by cities to refinance debt issuances to take advantage of lower interest rates. The purpose of these bonds is to restructure debt in a way that saves taxpayer dollars.

TML has alerted city officials in Texas about the proposals affecting certain tax-exempt bonds so that they can evaluate the potential impact in their city.  TML is also urging city officials to discuss the tax reform proposals with members of Congress.