Federal Tax Reform

Comparable Tax Incentives

Congress regularly uses federal tax incentives to encourage certain forms of energy investments (such as incentives to promote certain energy resources to address climate change). When they do so, Congress should draft tax-based incentives to accommodate tax-exempt entities, including public power utilities.

Such tax credits should be “refundable” beyond an owner’s tax liability, permitting public power utilities to qualify for these credits. Otherwise, public power communities may be forced to pay more for those technologies or resources than those served by other utilities. Such comparable incentives permit taxpayer dollars to be used more efficiently to accomplish Congressional intent.

Supporting Municipal Bonds

Now more than 200 years old, the U.S. municipal bond market is well established, providing close to 42,000 governmental issuers access to investors. This market is particularly important to smaller towns, counties, and publicly owned utilities that issue municipal bonds as their primary source of capital. Having no shareholders and no stock to issue, public power utilities have limited means to raise funds for capital needs outside of municipal bonds.

Investors who purchase municipal bonds accept a lower rate of return because the interest is exempt from federal income tax. Municipal bonds are also valued for their ability to generate a steady stream of revenue for fixed-income households.

Considering the essential nature of municipal bonds for municipalities and the appeal of the bonds for investors, Congress should reject any proposal to limit or restrict the tax exemption for municipal bond interest.

Build America Bonds Sequestration

During the financial crisis of 2008, Congress authorized a new form of bond to help stimulate investment in infrastructure. So-called Build America Bonds (BABs) authorized the federal government to provide a portion of the bond interest payment. In 2012, during a fight between the White House and Congress over sequestration cuts, the White House Office of Management and Budget decided that credit payments to other entities—including BAB credit payments to BAB issuers—were not protected from sequestration cuts, contradicting earlier statements by the Treasury Department and clear Congressional intent.

It is tantamount to a breach of contract for bond issuers to have negotiated financial deals based on the promise of a payment on which the federal government is now reneging. Congress must act to block the elimination of BAB credit payments.

Advance Refunding

Congress should repeal the Tax Cuts and Jobs Act language prohibiting the issuance of advance refunding bonds.

Like refinancing a mortgage, states and localities can “refund” tax-exempt municipal bonds by issuing new bonds to pay off the existing higher-interest bonds. This flexibility can mean significant savings over time. But under the terms of most municipal bonds, states and localities generally must wait 10 years before they can “call” (i.e., pay off) a municipal bond. This is intended as a protection for the bondholder. However, waiting to refund an existing bond until it can be called can be a problem when interest rates are low but threatening to rise.

Until the passage of the Tax Cuts and Jobs Act of 2017, states and localities had an easy fix: issue a refunding bond while interest rates are low, then pay-off (or “redeem”) the old bond when the call date arrives. But the Tax Cuts and Jobs Act of 2017 prohibited the issuance of tax-exempt advance refunding bonds after December 31, 2017. This provision was never debated, never publicly championed by any member of Congress, and never subjected to a vote. As a result, issuers must now either wait to issue a current refunding bond or issue an advance refunding bond as taxable debt, unnecessarily increasing costs for municipal communities.

Legislative Update

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