On November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act (the “IIJA”) into law. The IIJA provides for an estimated $1.2 trillion in funding over ten years for a broad range of infrastructure sectors, including roads, bridges, public transit, passenger and freight rail service, water infrastructure, environmental remediation, electric power grids, renewable energy, and broadband infrastructure. Additionally, the IIJA includes new tax-advantaged bond provisions that create two new categories of exempt facility bonds - qualified broadband projects and qualified carbon dioxide capture facilities – and increases the aggregate national cap for exempt facility bonds financing qualified highway or surface freight transfer facilities. This client alert will summarize the IIJA’s tax-advantaged bond provisions.
A. New Categories of Exempt Facility Bonds
i. Qualified Broadband Projects
Under the IIJA, governmental entities and instrumentalities thereof are permitted to issue tax-advantaged bonds for any “qualified broadband project”, provided that all tax law requirements are met. The IIJA defines a qualified broadband project as any project which: (A) is intended to provide broadband service exclusively to one or more census block groups in which greater than 50 percent of residential households lack access to fixed, terrestrial broadband service that supplies at minimum 25 megabits per second downstream and at minimum 3 megabits service upstream (a “Qualifying Service Area”), and (B) ultimately produces internet access at speeds of at least 100 megabits per second for downloads and 20 megabits per second for uploads to a location that 90% or greater of comprise a Qualifying Service Area prior to the project.
Pursuant to the IIJA, an exempt facility bond that finances a privately owned qualified broadband project is 75% exempt from volume cap requirements and governmentally owned projects are not subject to any volume cap requirements.
ii. Qualified Carbon Dioxide Capture Facilities
The IIJA also creates the ability to use tax-advantaged financing for “qualified carbon dioxide capture facilities”, if all tax law requirements are satisfied. Under the IIJA, a qualified carbon dioxide capture facility is the eligible component of an industrial carbon dioxide facility and a direct air capture facility. The IIJA specifically defines the terms “eligible component” and “industrial carbon dioxide facility”, and adopts from the tax code a definition for a “direct air capture facility”.
(1) Eligible Component
Under the IIJA, an “eligible component” is any equipment that: (A) is installed in an industrial carbon dioxide facility that is either designed to have capture and storage of at least 65%, or the percentage of the cost of the eligible components installed in the facility that is financed with tax-exempt bonds is not greater than the designed capture and storage percentage and (B) is used for the purpose of capture, treatment and purification, compression, transportation or on-site storage of carbon dioxide produced by the industrial carbon dioxide facility, or to help convert coal, petroleum residue, biomass, or other materials into a synthesis gas that consists primarily of cardon dioxide and hydrogen for direct use or subsequent chemical or physical conversion.
(2) Industrial Carbon Dioxide Facility
The IIJA defines an “industrial carbon dioxide facility” as a facility that emits carbon dioxide (including from any fugitive emissions source) that is produced through fuel combustion, gasification, bioindustrial processes, fermentation, or any manufacturing industry relating to chemicals, fertilizers, glass, steel, petroleum residues, forest products, agriculture and transportation grade liquid fuels. Excluded from the definition of an industrial carbon dioxide facility is any geological gas facility and any air separation unit that does not qualify as gasification equipment, or that is not a necessary component of any oxygen fuel combustion process.
(3) Direct Air Capture Facility
Under the tax code, a “direct air capture facility” generally means any facility that uses carbon capture equipment to capture carbon dioxide directly from the ambient air. The tax code excludes from this definition any facility which captures carbon dioxide deliberately released from naturally occurring subsurface springs, or uses natural photosynthesis.
(4) Volume Cap and Private Business Use Exemption
Tax-advantaged bonds that finance qualified carbon dioxide capture facilities will be 75% exempt from volume cap requirements. Finally, the IIJA amends the tax code to clarify that the sale of carbon dioxide produced by a governmentally owned qualified carbon dioxide capture facility will not constitute “private business use” under federal tax law.
iii. Effective Date
The rules described in A.i.-A.ii. above for exempt facility bonds will apply to any debt obligation issued after the end of 2021.
B. Increase of National Cap for Qualified Highway or Surface Freight Transfer Facilities
The tax code permits the use of tax-exempt financing for “qualified highway or surface freight transfer facilities.” However, the aggregate amount of this category of exempt facility bonds that can be issued nationwide is capped. Effective November 16, 2021, the IIJA increases this national limitation from $15 billion to $30 billion.