2019 Bond Modernization.

• Author: Brock, Emily S.
• Position: Federal Focus

While the tax exclusion for municipal bond interest remained intact despite threats of elimination during the Tax Cuts and Jobs Act (TCJA) debate in 2017, the 116th Congress may continue to look at changes to the tax code that affect public finance. Providing the tax exemption to municipal bond investors comes at a cost to the federal government, though,so the exemption itself is always vulnerable.

The benefit of the municipal bond market is no surprise to state and local government finance officers. Tax-exempt bonds are the primary mechanism through which state and local governments raise capital to finance a wide range of essential public infrastructure projects. The volume of municipal bond issuance for the period from 2007 to 2017 amounted to $3.6 trillion. The Joint Commission on Taxation tallied the total cost of providing the tax exemption at $359 billion. (1) What this means is that state and local governments are using the tax exemption to provide tenfold the investment in infrastructure that it costs the federal government to provide. If state and local governments lose the ability to use tax-exempt bonds and are compelled to issue taxable bonds an alternative, there could be devastating consequences to our nation's infrastructure.

Despite a notably lengthy partial federal government shutdown, the 116th Congress began work in January 2019 to address their work product for the coming two years; this will undoubtedly include an intense interest in finding solutions for infrastructure and a critical assessment of the federal government's ability to provide a funding stream for infrastructure. Together with the Administration, the Democratic House and the Republican Senate will work toward advancing mutual goals, including plans that will address America's infrastructure.

Below is an overview of GFOA's positions on legislation that would help modernize the municipal bond market and allow issuers to continue to improve and enhance our nation's infrastructure.

FEDERAL TAX POLICY AND THE 2017 TAX CUTS AND JOBS ACT

Current Status of Federal Tax Policy. The Tax Cuts and Jobs Act (TCJA), which was passed by Congress and signed into law in 2017, made several changes to the tax code that are of interest to governments. Although the full tax exemption for municipal bond interest was successfully retained, other changes noteworthy to issuers of municipal bonds include:

* The elimination of advance refunding.

* The elimination of tax credit bond...