Support to Restore Nixed Municipal Refinancing Tool Grows in Congress

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The 2017 federal tax overhaul eliminated tax-exempt advance refunding, but the coronavirus crisis has lawmakers looking at the possibility of bringing it back.

Bipartisan support is building in Congress to restore a popular state and local government refinancing method that Congress eliminated with the massive federal tax overhaul that President Trump signed into law about two-and-half years ago.

Legislation that Sen. Roger Wicker, a Mississippi Republican, introduced last week would repeal the section of the 2017 tax law that abolished tax-exempt advance refunding bonds. The move comes as the coronavirus outbreak strains state and local government finances.

“The coronavirus outbreak has placed enormous pressures on state and local governments,” Wicker said in a statement last week. 

“Restoring advance refunding is a proven way to give our local leaders the ability to manage existing debts, reduce costs, and free up additional money for much-needed local infrastructure projects. At a time when interest rates are at historic lows,” he added.

Wicker chairs the Senate Commerce, Science, and Transportation Committee. The bill has attracted four Democratic and three Republican co-sponsors, including John Barrasso, who is the third-ranking member in the Senate Republican leadership.

A proposal pending in the House that would restore tax-exempt advance refunding has 20 Democratic and eight Republican co-sponsors. Rep. C. A. Dutch Ruppersberger, a Maryland Democrat and a founder of the municipal finance caucus, introduced that bill last year.

Over the years, tax-exempt advance refundings helped state and local governments save billions of dollars in borrowing costs. The Government Finance Officers Association cites an estimate that during the five-year period from 2013 to 2017, the advance refunding of municipal securities saved taxpayers at least $12 billion.

Like other kinds of municipal debt, the interest investors earned on the bonds was exempt from federal income tax prior to the 2017 tax law taking effect. But the tax law nixed that exemption, putting the brakes on advance refunding transactions in 2018.

Advance refunding provided state and local government borrowers with a way to issue new debt to refinance or restructure outstanding bonds more than 90 days before the outstanding bonds hit their “call date,” which is a date when the borrower is allowed to pay them off.

That’s in contrast to a “current refunding,” which takes place inside that 90-day window. Tax-exempt current refundings are still allowed under federal law.

The advantage of advance refundings is that they enable borrowers to take advantage of low interest rates available outside of the 90-day current refunding timeframe.

When Republicans assembled their tax package back in 2017, they looked for offsets to help pay for the corporate and individual tax cuts that were central to the legislation, which was expected to erode about $1 trillion of federal tax revenue over a decade. 

Eliminating the advance refunding exemption gained them a roughly $17.4 billion offset.

Groups representing state and local governments unsuccessfully fought to retain the tax break as the tax legislation moved through Congress and have been pushing since it became law to get the tax exemption for advance refundings restored.

The National League of Cities, U.S. Conference of Mayors, National Association of Counties and National Conference of State Legislatures are among the groups that have endorsed the legislation proposed by Wicker. The bill has been referred to the Senate Finance Committee.

Bill Lucia is a senior reporter for Route Fifty and is based in Olympia, Washington.

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