Bond market prefers Senate’s ideas for taxes

Exemption said crucial for government issuers

CHICAGO — The Senate Republican tax bill helped soothe nerves in the municipal bond market on Friday, just over a week after the House of Representatives proposed changes that would decrease its future supply of tax-free debt.

While House Republicans sought to remove federal tax exemption for private activity bonds, an outline of the Senate’s proposal released late Thursday does not include that provision among its list of revenue raisers.

“When the Senate’s plan came out with no change to the tax exemption for private activity bonds, I think it gave the market a chance to take a sigh of relief,” said Alan Schankel, a managing director at Philadelphia-based Janney Montgomery Scott.

The termination of tax-exempt PABs in the House bill sent shock waves through the $3.8 trillion market after the Ways and Means Committee introduced it Nov. 2.

Almost $102 billion of the bonds, issued through states and local governments for development projects, airports, and nonprofits like hospitals, were sold in 2015, according to Wells Fargo Securities. That accounted for 27 percent of overall long-term municipal debt sold that year.

The House plan contends that eliminating the exemption will raise $38.9 billion for the federal government between 2018 and 2027.

Analysts have questioned that figure, arguing that it was wrong to assume issuers would sell a similar amount of taxable bonds under the House plan.

“We feel more comfortable about (PABs’) future long term with the Senate bill,” said Tim Fisher, legislative and federal affairs coordinator for the Council of Development Finance Agencies.

But Emily Swenson Brock, director of the Government Finance Officers Association’s Federal Liaison Center, cautioned that amendments to the Senate bill were expected over the weekend and that the status of PABs will not be clear until later.

Like the House bill, the Senate’s measure eliminates the alternative minimum tax. That tax is applied to earnings from a small percentage of muni bonds sold by issuers such as airports and housing authorities that have substantial private-activity components in their deals.

Both plans end tax-exempt status for advance refunding bonds, which issuers in the municipal bond market use to take advantage of lower interest rates before outstanding bonds can be called back from investors.

Brock said groups are trying to explain to Congress that the practice is a big cost saver for state and local governments, schools and other issuers.

Issuers of the bonds are rushing to get deals done before year end, said Emilie Ninan, a bond lawyer and partner at Ballard Spahr LLP in Wilmington, Delaware.

“I don’t think anybody should be taking comfort that this is a done deal,” Ninan said.