The United States Senate Finance Committee has published a broad list of ideas for tax law changes. Many of the original “Trump Tax Cuts” from 2017 are set to expire this year. Under Congress’s own rules, if those cuts are to be extended, then Congress needs to impose spending cuts or other tax policy changes to “pay for” the cuts. The Committee list also includes ideas for additional tax cuts that could require more changes to pay for those. This is not yet proposed legislation, but a starting point for discussions.
At least three of the proposals would have specific effects on tax-exempt bond financing, as follows:
- Completely eliminate tax-exemption for local government bonds. I can’t see that happening, at least not now.
- Eliminate tax-exemption just for bonds that are issued to benefit private entities, such as for affordable housing or financing for non-profits (generally referred to as “private activity bonds”).
- Reduce the corporate tax rate. Reduction in general tax rates tends to cause rates on tax-exempt bonds to go up, because the benefit of the tax-exemption becomes less valuable if tax rates are lower.
I think we will see tax changes that will have real-world effects on local governments. I expect we will see significant new limitations on private activity bonds and a cut in the general corporate tax rates. I would not be surprised to see the expansion of the alternative minimum income tax to include more bond interest, which would tend to lead to higher interest rates, or perhaps tightening up the rules for bank-qualified bonds. Our little corner is in for some changes.
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