APPA Joins State And Local Stakeholders To Oppose “Minimum” Tax On Bond Interest

November 3, 2021

by APPA News
November 3, 2021

The American Public Power Association (APPA) has joined with other state and local stakeholders in opposition to the inclusion of municipal bond interest in a new Corporate Alternative Minimum Tax (AMT) included in the latest draft of the Build Back Better Act.

In their Nov. 1 letter to congressional leaders, APPA and the other groups note that tax-exempt bonds are the primary mechanism through which state and local governments raise capital to finance a wide range of essential public projects.

“This includes not only local roads, highways, and bridges, but also — among other things — airports, public transportation, affordable housing, water and wastewater, schools, libraries, town halls, nonprofit hospitals and universities, police and fire stations, and electric power and gas facilities. These are the investments that make our communities livable and commerce possible,” the letter said.

“Above all else, our groups are committed to minimizing the cost of financing these projects — costs that must be paid by our communities -– by preserving the tax exemption on municipal bonds,” the groups said in the letter.

The groups voiced alarm that section 138101, Corporate Alternative AMT, of the Rules Committee Print of the Build Back Better Act would impose a 15 percent minimum tax on tax-exempt bond interest for purchasers that currently hold about one quarter (or just under $1 trillion) of outstanding tax-exempt municipal bonds.

“Ultimately, this tax will not be borne by corporations, but by our communities, in the form of higher interest demanded by bondholders,” the letter went on to say.

“Our organizations are currently analyzing the effect of this provision, but we know that the Congressional Research Service estimates that subjecting private activity bonds to the individual AMT has raised the interest cost of those bonds by 50 basis points. Again, we do not know whether the effect would be identical, but can safely conclude that subjecting an even broader array of state and local government and non-profit bonds to this new tax will raise community borrowing costs.”

APPA and the other groups said that considering the size of the municipal bond market, with over $4 trillion in debt outstanding, “the costs will be significant and, again, will be borne by our communities, not by the holders of the bonds.”  

At the same time, provisions that would improve municipal finance by increasing flexibility and decreasing costs were excluded from the Rules Committee Print despite being approved by the House Committee on Ways and Means earlier this year. These include provisions to reinstate the ability to issue tax-exempt advance refunding bonds, to increase the small issuer exception from $10 million to $30 million, and to restore and expand the use of direct-pay bonds. “It is inconceivable that neither of the two infrastructure bills currently being considered by Congress include provisions to improve infrastructure financing,” the groups said.

Cities, counties and states will need to partner with the federal government in carrying out the policies proposed in Build Back Better, “but these added costs will severely impact our ability to do so,”: the letter states.

As a result, the groups urged the House and Senate to amend section 138101 of the Rules Committee print to exclude tax-exempt bond interest from the proposed Corporate AMT.

Specifically, for purposes of calculating the AMT, adjusted financial statement income should be decreased by interest that is excluded from gross income under Internal Revenue Code Section 103.

“We would also strongly urge the House and Senate to include the elements of our bond modernization agenda, including reinstating the ability to issue tax-exempt advance refunding bonds, increasing the small issuer exception from $10 million to $30 million, and restoring and expanding the use of direct-pay bonds.”

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