On December 22, 2017, President Donald Trump signed into law the most far-reaching tax reform legislation in a generation after Congress approved a short-term spending bill on Thursday, which will keep the government funded through January 19, 2018. Thursday's bipartisan spending bill allowed the President to sign the $1.5 trillion tax bill this year without triggering $136 billion in cuts to federal programs, including direct subsidies for Build America Bonds, Recovery Zone Economic Development Bonds and other direct-pay bonds.

The Budget Reconciliation Act for Fiscal Year 2018—popularly known as "The Tax Cuts and Jobs Act" (TCJA)—is generally effective as of December 22, 2017, and repeals authority to issue advance refunding bonds and tax-credit bonds after December 31, 2017. However, some of the tax bill's provisions that indirectly impacts tax increment financing (TIFs) take effect immediately, including but not limited to, a provision that makes governmental capital contributions to corporations taxable (repealing portions of section 118). That contribution structure is common in TIF deals for governmental contributions to a corporate TIF developer, if made pursuant to a master development plan that was approved by the governmental contributor on or before December 21, 2017.

Other provisions of the TCJA may affect the value of tax-exempt bonds. The TCJA would, for tax years beginning after December 31, 2017, and before January 1, 2026, generally reduce individual marginal tax rates, increase individual income thresholds for higher tax brackets and reduce the number of individuals subject to the alternative minimum tax (“AMT”) by increasing both the exemption amounts and the exemption amount phase-out thresholds for taxpayers other than corporations. For tax years beginning after December 31, 2017, the TCJA would also repeal the corporate alternative minimum tax and would impose a 21% flat income tax on corporations, replacing 15%, 25%, 34%, and 35% marginal tax rates applicable in 2017 under section 11(b) of the Internal Revenue Code. 

These provisions will indirectly affect the value of tax-exempt bonds to bondholders, because a 40% corporate tax rate cut is expected to tighten yields between taxable and tax-exempt securities. The after-tax value of interest paid on tax-exempt bonds is 14% more valuable in a 35% corporate tax environment than in a 21% corporate tax environment. Many banks have anticipated that difference and negotiated provisions in direct purchases which will effectively raise the cost of borrowing for many tax-exempt issuers and borrowers to offset the lower value of tax-exempt debt in an environment with a lower U.S. tax rate. Those provisions may become effective as of January 1, 2018.

The effect of the 21% rate may be felt immediately in many outstanding bonds purchased by banks as a result of interest rate provisions that require a recalculation of the rate, based on a change in the corporate tax rate.