Member Alert: Private Activity Bonds

Call your member of Congress. PABs are up for elimination in HR1, the Tax Bill.

Provide them with any data or anecdotes that describe the impact of Private Activity Bonds in your jurisdiction.

 

What are Private Activity Bonds?

municipal security of which the proceeds are used by one or more private entities. A municipal security is considered a private activity bond if it meets two sets of conditions set out in Section 141 of the Internal Revenue Code. A municipal security is a private activity bond if, with certain exceptions, more than 10 percent of the proceeds of the issue are used for any private business use (the “private business use test”) and the payment of the principal of or interest on more than 10 percent of the proceeds of such issue is secured by or payable from property used for a private business use (the “private security or payment test”). A municipal security also is a private activity bond if, with certain exceptions, the amount of proceeds of the issue used to make loans to non-governmental borrowers exceeds the lesser of 5 percent of the proceeds or $5 million (the “private loan financing test”). The following categories of private activity bonds are qualified bonds under current federal tax laws:

Exempt facility bonds – Private activity bonds issued to finance various types of facilities owned or used by private entities, including airports, docks and certain other transportation-related facilities; water, sewer and certain other local utility facilities; solid and hazardous waste disposal facilities; certain residential rental projects (including multi-family housing revenue bonds); and certain other types of facilities. Enterprise zone and recovery zone facility bonds are also considered exempt facility bonds.

Qualified 501(c)(3) bonds – Private activity bonds issued to finance a facility owned and utilized by a 501(c)(3) organization. Qualified 501(c)(3) bonds are not subject to the federal alternative minimum tax.

 

What is GFOA’s Position on Private Activity Bonds?

GFOA’s Policy on Non-Governmental Bonds (2007)

PABs are widely used for airport and seaport projects, affordable housing, nonprofit health, and education facilities, all of which contribute to vibrant local communities. In 2016, over $72 billion in PABs used largely by nonprofit hospitals and universities (the private user in these deals is typically the 501 (c)(3) organization that owns and operates the facility) were issued and in the same year over $12 billion were issued to support airports, housing, and rural public cooperatives.

Supporting private activity bond issuance for public purposes (albeit these bonds should be reclassified away from PABs), has been a longstanding GFOA positions.  This legislation would strip away the ability of governments to issue this debt and could impact up to a third of the municipal bond market. That in turn would cause pressures on the entire municipal bond market.  Furthermore, concerns remain that Congress could continue to look at other offsets for their tax proposal, which could lead to them eliminating or curbing authority for tax-exempt general obligation and revenue bonds to be issued.  It is imperative for state and local governments to convey opposition to eliminating PABs, eliminating advance refundings, as well as the importance the municipal bond market plays in providing essential infrastructure in communities across America.

 

Why is Congress proposing to eliminate tax-exempt Private Activity Bonds?

Congress has proposed to eliminate many current provisions that would pay for lowering tax rates to individuals and corporations. Private Activity Bonds are eliminated in the proposed tax bill (H.R. 1).

H.R. 1 Section 3601

Provision: Under the provisions, interest on newly issued PABs would be included in income and thus subject to tax. The provisions would be effective for bonds issued after 2017.

Considerations:

  • The Federal government should not subsidize the borrowing costs of private businesses, allowing them to pay lower interest rates while competitors with similar creditworthiness but that are unable to avail themselves of PABs must pay a higher interest rate on the debt they issue.
  • The provisions would not apply to any previously issued bond, nor would the provisions prevent State and local governments from issuing PABs in the future; the provisions would merely remove the Federal tax subsidy for newly issued bonds.

How much will this save the federal government: According to JCT, the provisions would increase revenues by $38.9 billion over 2018-2027.

 

GFOA talking points:

  • These bond issuances are important to vital to support a variety of public services such as hospitals, airports, utilities, transit and education facilities.  
  • If your jurisdiction issues PABs for these public purposes, please reach out to your Congressional delegation and oppose their elimination in H.R.1. 
  • The most effective argument for you to make would be to include any data or anecdotes that describe the impact of Private Activity Bonds in your jurisdiction.