Advance refundings represented 27% of municipal bond market activity in 2016 and 19% in 2017. Additionally, the TCJA decreased the overall corporate tax rate from 35% to 21% and eliminated other tax incentives that could impact overall demand for municipal bonds. Market experts are keeping a keen eye to see how the market will react to possibly reduced supply, less demand due to corporate tax changes, or perhaps increased demand by individuals who are looking for tax exempt products to help alleviate tax exposures due to new state and local tax deduction limits. Governments should be aware of these market dynamics as they consider going to market and determine appropriate action with consultation of outside professionals.
The 115th Congress saw a bipartisan effort to restore advance refunding to the federal tax code. In the 116th, led by House Municipal Finance Caucus Co-Chairs Dutch Ruppersberger (D-MD) & Steve Stivers (R-OH), the efforts continue through the introduction of H.R. 2772, the Investing in Our Communities Act. Advance refunding bonds allow states and localities to refinance existing debt with the greatest flexibility, resulting in substantial reductions in borrowing costs. The elimination of advance refundings in the TCJA as a cost-savings tool for state and local governments has limited the options to refinance debt, especially since interest rates will certainly fluctuate over the lifetime of outstanding governmental bonds (which in many cases is 30 years). As a result, state and local governments are now paying more in interest, a cost that must be paid by state and local residents.
RESTORE ADVANCE REFUNDING BONDS
Proposed Legislative Change:
Reinstate authority to issue tax-exempt advance refunding bonds.
- Cosponsor H.R. 2772 and call on House leadership to advance this critical legislation to reinstate advance refunding bonds. H.R. 2772 would fully reinstate tax-exempt advance refundings, including private activity bonds and qualified 501(c)(3) bonds.
- 10-year revenue effect estimated at ~$17 billion.