Prior to January 1, 2018, Section 149(d) of the Internal Revenue Code (26 U.S.C. § 149) and the accompanying Treasury Regulations allowed the issuance of tax-exempt advance refunding bonds. According to that section, a bond is “treated as issued to advance refund another bond if it is issued more than 90 days before the redemption of the refunded bond.” Issuers could advance refund governmental bonds and qualified 501(c)(3) debt on a tax-exempt basis. Bond proceeds would typically be held in escrow, invested or uninvested, until being used to pay off the debt on a future date. For bonds issued prior to 1986, IRC § 149(d) allowed two tax-exempt advance refundings with respect to a particular series of bonds, and for bonds issued after 1985, IRC § 149(d) allowed one tax-exempt advance refunding.
Issuers utilized tax-exempt advance refundings for a variety of reasons, such as achieving interest rate savings or extinguishing covenants attached to outstanding indebtedness, in each case when the bonds could not be redeemed because of call protection or other restrictions. The Tax Cuts and Jobs Act of 2017 (“TCJA”) repealed the exclusion from gross income interest on bonds issued to advance refund another bond. This modification applies to advance refunding bonds issued after December 31, 2017. The theoretical rationale for ending tax-exempt advance refundings was to eliminate duplicate tax-exemptions on the same financed assets; this change in law helped Congress’ “budget scoring” for the TCJA, offsetting part of the scored revenue reductions arising from the TCJA’s tax rate cuts. By contrast, the practical effect of ending tax-exempt advance refundings is that an issuer may only issue tax-exempt refunding bonds at or within 90 days before the first optional call date. Now, advance refundings can only be done with taxable bonds.
Although interest rates have hit historic lows over the past year, some issuers remain burdened with higher interest rates as they await future optional redemption dates. Furthermore, COVID-19 has had far-reaching negative implications for many state and local issuers, including decreased revenues and sales taxes in some areas. Reinstating tax-exempt advance refundings could free up much-needed capital for infrastructure projects and other economic recovery projects.
In the past several years, legislators have made several attempts to enact legislation reinstating tax-exempt advance refundings, including the Lifting Our Communities through Advance Liquidity for Infrastructure Act of 2020 and, more recently, the Investing in Our Communities Act, sponsored by Representatives Steve Stivers (R-OH) and Dutch Ruppersberger (D-MD). A companion version of the bill was introduced in February, 2021, by Senators Roger Wicker (R-MS) and Debbie Stabenow (D-MI). In a guest column for The Daily Journal, Sen. Wicker outlined the intent for the re-introduction of tax-exempt advance refunding:
“This legislation would allow state and local governments to take advantage of low interest rates and redirect the savings toward infrastructure needs. This process, known as advance refunding, is similar to how homeowners can refinance their mortgages to realize greater savings. This could free up billions of dollars for local communities.”
Both House and Senate bills have bipartisan backing and enjoy the support of several municipal and county organizations. Federal budgetary impacts of tax-exempt advance refundings, while always more of a theoretical than a practical problem, may no longer be of concern to the majority of Congress. This is especially true in the post-COVID landscape, with greater political appetite and urgency for the federal government to provide tools to fuel economic recovery.
 26 U.S.C. 149(d)(2).
 See “Tax Cuts and Jobs Act,” Pub. L. No. 115–97 (Dec. 22, 2017), available at https://www.congress.gov/115/plaws/publ97/PLAW-115publ97.pdf.
 See H.R. 2288, available at https://www.congress.gov/bill/117th-congress/house-bill/2288/text?q=%7B%22search%22%3A%5B%22advance+refunding%22%5D%7D&r=1&s=1.
 See S.479, available at https://www.congress.gov/bill/117th-congress/senate-bill/479/text?q=%7B%22search%22%3A%5B%22advance+refunding%22%5D%7D&r=2&s=2
 Roger Wicker, “ROGER WICKER: Better bond rates would boost recovery,” available at https://www.djournal.com/opinion/roger-wicker-better-bond-rates-would-boost-recovery/article_476c1351-13f8-560b-9315-5db926e80751.html (last accessed March 31, 2021).