An obscure provision of the House tax bill (H.R. 1, Section 3601) threatens to end a financing tool that has been used by local governments for years to fund critical infrastructure such as airports, seaports, hospitals, educational facilities, affordable housing and tollways, to name a few. Private activity bonds, as they are called, are tax-exempt bonds that are typically issued by municipalities to finance private projects that serve a public purpose.
Some estimates put the loss to the municipal bond market at 20 percent of the $3.7 trillion market – that is the share of the market held by private activity bonds. Consequently, housing advocates, finance officers and local government officials are working hard to raise their concerns with members of Congress as the Senate and the House must now reconcile competing bills. The Senate bill does not contain a similar provision aimed at eliminating the tax exempt financing program.
So why would House members seek elimination of such a widely used financing tool? First and probably foremost, they have to find ways to pay for a reduction in corporate and individual tax rates. One estimate puts the savings at $38.9 billion over ten years beginning in 2018 (see Government Finance Officers Member Alert). In addition, members of Congress argue that the federal government shouldn’t subsidize financing of private development when some competitors don’t qualify for the bonds. Supporters argue that the private development serves a public purpose and the bonds are widely available to competitors in the market place.
Meanwhile, now that the Senate passed its version of the tax bill, calls to spare private activity bonds from the congressional ax will grow louder. A number of industry groups are actively lobbying the issue and circulating talking points to constituents. However, if these efforts are unsuccessful, billions in new projects may be shelved or delayed as proposers look for new sources of project financing.
The Minneapolis Star Tribune published an article recently that describes how this provision has caused concern for affordable housing advocates.