House Ways and Means Committee Draft Bill May Affect the Municipal Bond Market
On September 10, 2021 the House Ways and Means Committee released details for their portion of the reconciliation package. While the Committee will continue to work, the following is what has been released.
Credit for Certain Infrastructure Bonds
American Recovery and Reinvestment Act issuers of qualified infrastructure bonds would receive a credit equal to an applicable percentage of the interest, providing direct financing support for infrastructure investments made by state and local governments. To receive the credit, the entire net proceeds must be used for capital expenditures or the operation and maintenance of capital expenditures. 100% of the bond proceeds must meet the requirements of the Davis-Bacon Act. This would apply to bonds issued after December 31, 2021.
Advance Refunding Bonds
Advance refunding would once again be permitted. The interest on advance refunding bonds issued by state and local governments would be exempt from tax.
Permanent Modification of the Small Issuer Exception to Tax Exempt Interest Expense Allocation Rules for Financial Institutions.
Currently, there’s an exception for interest expense allocable to certain tax-exempt obligations issued by qualified small issues. Qualified small issues are defined as issues that are not reasonably expected to issue more than $10 million in tax exempt obligations during a calendar year, generally. This revision would increase the $10 million limit to $30 million (indexed annually for inflation). Also, qualified 501(c)(3) bonds would be treated as tax exempt obligations for purposes of the small issue exception.
Modification to Qualified Small Issue Bonds
The definition of eligible manufacturing facilities eligible for financing through qualified small issue bonds would be expanded to include facilities used for the creation or production of intangible property, and facilities functionally related and subordinate to facilities used for the manufacturing, creation, or productions of tangible and intangible property. The aggregate cap would also be increased to $30 million, indexed annually for inflation.
Expansion of Certain Exceptions to the Private Activity Bond Rules for First Time Farmers
The limitation on the exemption of the use of private activity bonds for first-time farmers would be increased to $552,500, indexed for inflation on an annual basis. The separate lower dollar limitation on the purchase of used farm equipment would be repealed.
Water and Sewage Facility Bonds
As of July 1, 2020, exempt facility bonds for existing water and sewage facilities would be exempt from the private activity bond volume cap.
Exempt Facility Bonds to Include Zero Emission Vehicle Infrastructure
The definition of exempt facility bond eligible for tax exempt private activity bond financing would be expanded to include zero emission vehicle infrastructure. Zero emission vehicle infrastructure is defined as any depreciable property (excluding a building and its structural components) used to charge or fuel zero emissions vehicles.
Davis Bacon Act’s Prevailing Wage Requirement
The Davis Bacon Act’s prevailing wage requirements will be required to proceeds of exempt facility bonds used for the construction, alteration, or repair of water furnishing facilities, sewage facilities, zero emission vehicle infrastructure facilities, or highway or surface freight transfer facilities after the date of enactment.
Victoria S. Byerly is an attorney in KAV’s Public Finance Group. A specialist in Section 103 of the Internal Revenue Code, her practice is exclusively dedicated to state and federal tax matters related to the issuance of tax-exempt debt obligations.