The Built By Bonds Coalition seeks to preserve the ability of state and local governments to finance public projects at the lowest cost possible. Coalition members include organizations representing state and local governments, the insurance industry, municipal bond issuers, professional sports leagues and representatives of bond market participants.
The Built By Bonds Coalition is unified in its opposition to eight proposals contained in the Joint Committee on Taxation’s (JCT) January 2005 report for the Senate Finance Committee titled Options to Improve Tax Compliance and Reform Tax Expenditure that would drive up the cost of borrowing for state and local governments. In many instances, those costs will be borne by the citizens of those governments in the form of increased state and local taxes or user fees.
We encourage you to join our effort to preserve the vital role of municipal finance in meeting the needs of America’s state and local governments. Please click on the “Contact Congress” link above to send a correspondence to your Members of Congress. You will have the option to send a support letter electronically to your Member of Congress, or you may print off a form letter to be faxed or sent by traditional mail.
The JCT Proposals Would:
Eliminate Advance Refundings
- Governmental and 501(c)(3) tax-exempt bond issuers may “advance refund” outstanding bonds once throughout the lifetime of the bond, when interest rates fall, in order to save debt service costs.
- The JCT proposal would not allow issuers to have an advance refunding opportunity, thus eliminating a powerful financial management tool that state and local governments use to minimize financing costs for their taxpayers.
Repeal the Two percent Deminimis Exception
- Generally, corporations may not deduct that portion of their interest expense attributable to borrowings used to purchase tax-exempt obligations subject to one exception: corporations (other than banks and securities firms) may deduct such interest expense so long as its tax-exempt assets during a taxable year are two percent or less of its total assets (the “two percent deminimis exception”).
- The two-percent deminimis exception is not available to banks and securities firms. Thay are denied a deduction for that portion of their interest expense that equals a ratio based on their tax-exempt assets to their total assets (the “pro rata rule”).
- The JCT proposal would repeal the two-percent deminimis exception and apply the pro rata interest expense disallowance currently applicable to banks and securities firms to all corporations.
Apply the Pro Rata Rule to P&Cs
- Property and casualty insurance companies (P&Cs) are permitted a deduction for contributions to loss reserves.
- This deduction is reduced, however, by an amount equal to 15 percent of their “proration income,” which includes tax-exempt bond interest.
- The JCT proposal would apply to P&C’s the pro rata interest expense disallowance currently applicable to banks and securities firms in lieu of the current 15 percent proration rule.
Impose New Requirements on Pooled Financings
- Smaller tax-exempt issuers face disadvantages when accessing the bond markets and often borrow on a pooled basis due to the relatively small size of their transactions.
- In a pooled financing, a single entity acts as the nominal issuer for a group of small tax-exempt bond issuers, raises and loans the bond proceeds to the governmental borrowers participating in the pool.
- The JCT proposal would add tough new restrictions to the conduit borrowing process. Pooled bond issuers would be required to obtain written loan commitments from each of the participating entities in the pool, prior to issuing tax-exempt bonds and nonrefundable loan commitment fees from the governmental borrowers.
Reduce Flexibility of Housing Finance Agencies to Serve Low-Income Homebuyers
- Mortgage revenue bonds (MRB) are tax-exempt, private-activity bonds issued by state housing finance agencies (HFAs) to fund mortgages for qualifying homebuyers.
- By statute, qualifying homebuyers must be low- and moderate-income earners.
- HFAs have the option to provide homebuyers with mortgage credit certificates (MCCs) which permit qualified homeowners an annual federal income tax credit.
- Under the JCT proposal, HFAs would be required to allocate private-activity volume cap to mortgage credit certificates (MCCs) in an amount which would permit issuance of one dollar of MCCs for each four dollars of MRBs issued.
Curtail Bond Financing of Stadiums
- The tax-exemption on municipal bond interest only applies to private-activity bonds that meet certain tests and are used for qualified purposes.
- The JCT has proposed eliminating the private payment test for stadium transactions, which would effectively prohibit all tax-exempt financing for professional sports stadiums.
Create New Information Reporting Requirements for Tax-Exempt Issuers
- The JCT proposal is presented as two options. Under the first, issuers would have to file information reports annually specifying the amount of interest paid as well as the name, address and TIN for all investors to whom tax-exempt interest is paid. Under the second option, issuers would not have to file this information annually, but would be required to provide it to the IRS on demand.
Limit Indian Tribe’s Use of Tax-Exempt Proceeds
- Indian tribes have the authority to issue tax-exempt bonds which may be issued only for essential government functions and certain manufacturing facilities.
- Indian tribes can also be the beneficiaries of tax-exempt bonds that are arranged through a conduit issuer.
- The JCT proposal would clarify that the limitation on tax-exempt borrowing for Indian tribes applies whether the tribe is the direct issuer or a conduit borrower.