Muni Tax Out­look For 2019 Bright

The Bond Buyer - - Front Page - By Brian tu­multy

WASH­ING­TON – The leg­isla­tive out­look for the tax treat­ment of mu­nic­i­pal bonds is brighter in 2019 than a year ago with a strong sup­porter of mu­nic­i­pal bonds as­cend­ing to the chair­man­ship of the Ways and Means Com­mit­tee as part of the new Demo­cratic ma­jor­ity.

Rep. Richard Neal, D-Mass., be­gins serv­ing as chair the panel that for­mu­lates fed­eral tax pol­icy with a pledge to ask may­ors, gover­nors and other mu­nic­i­pal mar­ket ad­vo­cates to tes­tify at hear­ings early in the year on the im­pact of the 2017 Tax Cuts and Jobs Act.

That leg­is­la­tion was a blow to the mu­nic­i­pal bond mar­ket be­cause of the ter­mi­na­tion of ad­vance re­fund­ings. Resto- ra­tion of them is a high leg­isla­tive pri­or­ity of the Gov­ern­ment Fi­nance Of­fi­cers As­so­ci­a­tion, the Na­tional As­so­ci­a­tion of Bond Lawyers and the Se­cu­ri­ties In­dus­try and Fi­nan­cial Mar­kets As­so­ci­a­tion, among oth­ers.

Repub­li­can Rep. Randy Hult­gren of Illi­nois, who was the spon­sor of a bill to re­store ad­vance re­fund­ings, lost his seat in the Novem­ber elec­tion.

NABL Pres­i­dent Dee Wisor, an at­tor­ney at But­ler Snow in Den­ver, said his or­ga­ni­za­tion is work­ing with GFOA to find a new spon­sor for the ad­vance re­fund­ings bill.

GFOA also had teamed up with state and lo­cal groups to fight elim­i­na­tion of the $10,000 cap on the fed­eral in­come tax de­duc­tion for state and lo­cal taxes.

Demo­cratic Rep. Bill Pascrell, a for­mer mayor of Pater­son, N.J. and a mem­ber of the Ways and Means Com­mit­tee, said he will spon­sor a pro­posal to fully re­store the SALT de­duc­tion that would be fully paid for from the off­set­ting rev­enue of rais­ing the cor­po­rate tax rate to 23% or 24% from 21%.

“We want to do ev­ery­thing

we can to pay for it,” said Pascrell. “It’s a pow­er­ful de­duc­tion in states that are high tax states.

Be­cause they are high den­sity states they’ve got dif­fer­ent needs than if you are liv­ing in Wyoming or North Dakota.”

Se­nate Re­pub­li­cans, how­ever, are un­likely to sup­port a par­tial roll­back of the re­duc­tion of the cor­po­rate tax rate they en­acted in De­cem­ber 2017.

A tax pro­vi­sion on the wish list of the Bond Deal­ers of Amer­ica is an in­crease in the limit for bank qual­i­fied loans to $30 mil­lion from $10 mil­lion, said Brett Bolton, BDA’s vice pres­i­dent of fed­eral leg­isla­tive and reg­u­la­tory pol­icy.

Muni groups are con­fi­dent that at the very least their re­quests will get pub­lic con­sid­er­a­tion.

Neal said on the House floor Dec. 20 dur­ing de­bate on tax pol­icy, “There will be hear­ings and there will be wit­nesses and it will be done in day­light to make sure there is an op­por­tu­nity for all to be heard, in­clud­ing our Repub­li­can friends.”

That state­ment was made dur­ing floor de­bate on a catch-all pack­age of tax mea­sures pushed by Neal’s pre­de­ces­sor, Rep. Kevin Brady, R-Texas, that failed to gain Se­nate con­sid­er­a­tion.

One those failed pro­vi­sions was a tax fix for bond-fi­nanced mul­ti­fam­ily hous­ing projects that have a res­i­dency pref­er­ence for mil­i­tary vet­er­ans.

Neal didn’t men­tion the muni pro­vi­sion, but he lec­tured Re­pub­li­cans for fail­ing to work in a bi­par­ti­san way on many year-end tax mea­sures Democrats sup­port.

He crit­i­cized them for pack­ag­ing the pro­vi­sions with poi­son pills, such as a mea­sure to al­low mem­bers of the clergy make po­lit­i­cal en­dorse­ments from the pul­pit with­out en­dan­ger­ing the tax-ex­empt sta­tus of churches and syn­a­gogues, and for not in­clud­ing rev­enue off­sets.

The muni pro­vi­sion was non­con­tro­ver­sial and the cost of it re­ceived only a non-con­se­quen­tial as­ter­isk in the non­par­ti­san Con­gres­sional Bud­get Of­fice anal­y­sis.

About half of the mul­ti­fam­ily hous­ing units built na­tion­ally that use the fed­eral 4% Low In­come Hous­ing Tax Credit are fi­nanced with tax-ex­empt pri­vate ac­tiv­ity bonds. The other half use a 9% fed­eral tax credit that does not al­low PAB fi­nanc­ing.

Fed­eral law doesn’t ex­plic­itly say that vet­er­ans qual­ify for a spe­cial needs ex­cep­tion to the pub­lic use rules gov­ern­ing the tax-ex­emp­tion for mul­ti­fam­ily PABs.

Trea­sury of­fi­cials have in­di­cated they don’t want to is­sue a pri­vate let­ter rul­ing to clear up the prob­lem, which leaves the so­lu­tion to be ei­ther through con­gres­sional leg­is­la­tion or pub­lished guid­ance such as a rev­enue no­tice.

Also caught up in the year-end im­passe on tax mea­sures was aid for dis­as­ter vic­tims through tax breaks and fed­eral aid to com­mu­ni­ties where those dis­as­ters oc­curred. Lo­cal­i­ties of­ten count on that aid to get back to busi­ness as usual and to help ward off ad­verse credit ef­fects.

Neal said he “will try very quickly to ad­dress many of these same is­sues” in the new Congress.

Wisor, the NABL pres­i­dent, isn’t op­ti­mistic much tax leg­is­la­tion will move in 2019 given that Congress will be di­vided with Re­pub­li­cans in con­trol of the Se­nate.

“I’m not sure that that’s go­ing to be any­thing other than maybe some po­lit­i­cal theater so they can say they are pro­vid­ing some trans­parency be­cause it seems hard to get 60 votes in the Se­nate to undo any­thing in the bill,” Wisor said.

“I do think that in­fra­struc­ture is a place where there’s an op­por­tu­nity for some bi­par­ti­san­ship,” Wisor added. “The peo­ple we have been talk­ing to on the Hill seem to agree with that. So maybe there’s an op­por­tu­nity for some nar­row tax pol­icy in the con­text of an in­fra­struc­ture bill. For ex­am­ple, ex­pand­ing pri­vate ac­tiv­ity bonds.’’

Ken Bentsen, pres­i­dent and CEO of SIFMA, sim­i­larly pre­dicted that in­fra­struc­ture can be an area of bi­par­ti­san agree­ment, not­ing there’s an im­pe­tus to do it be­cause the cur­rent fed­eral high­way bill ex­pires in 2020.

“We’re not an­tic­i­pat­ing a ma­jor tax bill,” Bentsen said. “At this point in time his­tor­i­cally you nor­mally wouldn’t see one so soon af­ter a prior tax bill. How­ever, we are al­ways dili­gent about pro­tect­ing the tax ex­empt sta­tus of mu­nic­i­pal bonds and that re­mains our top tax pri­or­ity.”

SIFMA of­fi­cials fore­see a re­vival of fed­eral di­rect-pay bonds as a pos­si­ble el­e­ment of an in­fra­struc­ture bill al­though they might not be called Build Amer­ica Bonds as they were in the re­cent past.

SIFMA and NABL have told con­gres­sional pol­i­cy­mak­ers that any new form of di­rect pay bonds will need to be ex­empt from across-the-board bud­get cuts un­der a se­quester to at­tract mar­ket in­ter­est.

They also have ad­vised that ex­ist­ing BABs, many of which are non-callable, should also be ex­empted from se­quester cuts.

“The point we made was that given what hap­pened on se­ques­tra­tion it’s prob­a­bly not go­ing to en­joy much sup­port from lo­cal gov­ern­ments if it is some­thing that is sub­ject to se­ques­tra­tion,” said Wisor.

“And so that will be part of the pol­icy de­bate,” he said. “Might you make it a like tax re­fund for an in­di­vid­ual which is not sub­ject to se­ques­tra­tion? That will be a ques­tion to be an­swered.”

SIFMA and NABL both fa­vor elim­i­nat­ing vol­ume caps for trans­porta­tion and in­fra­struc­ture re­lated PABs.

Each state has a vol­ume cap that ap­plies to cer­tain cat­e­gories of PABs. In ad­di­tion, there’s a $15 bil­lion na­tion­wide cap on high­way re­lated PABs that’s sub­ject to al­lo­ca­tions ap­proved by the U.S. De­part­ment of Trans­porta­tion.

Muni groups want those caps elim­i­nated.

Demo­cratic Rep. Earl Blu­me­nauer of Ore­gon said there’s “an ex­cel­lent chance” the $15 bil­lion cap will be raised, de­scrib­ing it as “a rel­a­tively easy lift.”

Rep. Brian Hig­gins, D-N.Y., with­held sup­port for House Demo­cratic Leader Nancy Pelosi to serve as speaker un­til she promised to make a best ef­fort to en­act in­fra­struc­ture leg­is­la­tion and an ex­pan­sion of Medi­care el­i­gi­bil­ity to peo­ple be­tween the ages of 50 and 64.

“It’s an agree­ment in prin­ci­ple to make a good-faith ef­fort to get those two is­sues done in the 116th Congress,” Hig­gins said in an in­ter­view.

Hig­gins, an eight term House mem­ber from Buf­falo, said too much em­pha­sis has been placed on eco­nomic need such as de­te­ri­o­rat­ing bridges and not enough has been placed on the ben­e­fits of in­fra­struc­ture in­vest­ment through job cre­ation and eco­nomic growth.

“Un­like tax cuts, in­fra­struc­ture does in ef­fect pay for it­self,” Hig­gins said. “For every dol­lar you in­vest, you get about $1.60 in eco­nomic growth.” Spend­ing $1 tril­lion over five years would pro­duce 11.5 mil­lion jobs and add 1-1/2% to 2% in an­nual eco­nomic growth an­nu­ally, he said.

How­ever, the ini­tial post-elec­tion op­ti­mism about the prospects for bi­par­ti­san agree­ment on tax pro­vi­sions to en­cour­age in­fra­struc­ture con­struc­tion has been tem­pered in re­cent weeks by Pres­i­dent Trump’s de­mand that any pack­age should in­clude fund­ing for a wall on the south­ern bor­der.

And Se­nate Demo­cratic Mi­nor­ity Leader Chuck Schumer of New York has said Democrats want any in­fra­struc­ture pack­age to in­clude pro­vi­sions for ad­dress­ing cli­mate change.

How much of those de­mands are sim­ply po­lit­i­cal mes­sag­ing is un­clear. ◽

Rep. Richard Neal, D-Mass., has vowed to lis­ten to mu­nic­i­pal mar­ket stake­hold­ers in the com­ing year.

Rep. Bill Pascrell said he will spon­sor a pro­posal to re­store the SALT de­duc­tion

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