On November 9, 2017, the House Ways and Means Committee approved H.R. 1 -- the Tax Cuts and Jobs Act -- which now is teed up for approval by the full House of Representatives.1 A few hours later, Senate Finance Committee Chairman Orrin Hatch released a detailed description of the "Chairman's mark" of the Senate's proposed version of the Tax Cuts and Jobs Act, with the full text to follow in the coming days.2 The Senate bill appears to differ from the House bill in numerous respects, and differences between the House and Senate versions would need to be reconciled and approved by both chambers before tax reform legislation can make it to the President's desk for signature.
As Clark Hill PLC has previously reported,3 the committee-approved House bill would terminate the issuance of four types of tax-exempt or tax-advantaged bonds: private activity bonds, advance refunding bonds, tax credit bonds, and bonds for professional stadiums.4 According to the description of the Chairman's mark, the Senate bill, as introduced, would also terminate all advance refunding bonds but would preserve private activity bonds, tax credit bonds and bonds for professional stadiums.
If the Senate bond provisions are adopted by the full Senate in their current form, the divergence between House and Senate versions on three categories of municipal bonds creates the opportunity for the municipal bond community to work toward moving the reconciliation process to accept the Senate version and retain the ability to issue private activity, tax credit and stadium bonds; however, this result cannot be presumed and continued engagement by this community is critical. Further, the agreement of the two bills on terminating advance refundings creates a difficult dynamic for convincing both chambers to reverse course and preserve advance refundings. If this provision is not stripped from the Senate version before it is approved by that chamber, the likelihood of eliminating it during the reconciliation process is doubtful at best.
It is widely believed that the advance refunding provision appears in both bills primarily due to the approximately $17 billion of additional revenue to the US Treasury over the ten-year period from 2018-2027 and not generally for policy reasons. Because Congress is using special budget reconciliation rules to allow the Senate to enact tax reform with a simple majority, the final legislation must meet a strict $1.5 trillion revenue loss target approved in the fiscal year 2018 budget. This has resulted in a sharp focus on finding tax changes that can produce new revenue to the US Treasury to make up for cuts elsewhere, creating a zero-sum approach to determining what provisions are included or excluded from the legislation. Identifying other sources for the estimated $17 billion price tag for advance refundings would greatly strengthen the other merit-based arguments for the value of permitting state and local governments to continue to refinance outstanding bonds at lower rates to realize savings for taxpayers. Market participants must remain vigilant and fully engaged in the legislative process or else risk the loss of this important refinancing tool.
1 The original text of the House bill is available here. Subsequent amendments to the bill approved by the House Ways and Means Committee did not modify the municipal securities provisions of the bill as originally introduced.
2 The description of the Chairman's mark of the Senate bill is available here.
3 See Clark Hill PLC Client Alert, "Tax Reform Takes Aim at the Municipal Securities Market," November 6, 2017, for a description of the municipal securities provisions of the House bill.
4 Even if enacted into law, state and local governments would still be permitted to issue bonds for these purposes, but only on a federally taxable basis (and, in the case of tax credit bonds, no tax credits would be available).
