Tax-exempt bonds axed in menu of options floated by Ways and Means

The House Ways and Means Committee is considering the total elimination of tax-exempt bonds, according to a 51-page list of targeted programs, policies and plans for a reconciliation bill obtained Friday by The Bond Buyer.

It’s a wide-ranging and tentative wish list, but marks a nightmare-come-true for the municipal bond market, which has spent months worrying that its treasured tax exemption would be on the chopping block.

Sources on the Hill indicate that whatever gets cut will come from that list. But that doesn’t mean that everything’s going to get cut.

“This is why we continue to advocate and educate on the Hill,” said Brett Bolton, vice president of federal legislative and regulatory policy at the Bond Dealers of America. 

“I know that they’re looking for any and all ways to pay for this expansive tax extension, but we’ll continue to work with our champions on the Hill to ensure that the tax exemption for municipal and other bonds is taken off the table once discussions become more serious.”

The BDA and other muni lobbyists like the Government Finance Officers Association are set to kick off a series of fly-ins to meet with lawmakers over the next few weeks.

The document, which was circulated Friday among some muni participants, also raises the prospect of eliminating the non-profit status of hospitals — which make up a significant chunk of the muni market — and several scenarios for changes to the state and local tax deduction cap, another agenda item that’s important to issuers and investors.

Eliminating the exclusion of interest on state and local bonds would generate $250 billion in savings over the 10-year timeframe required by a reconciliation bill, according to the list. “This option would end the exclusion, making income from municipal bond interest taxable,” the document said.

Ending “tax preferences” for private activity bonds, Build America Bonds, and other non-municipal bonds would result in $114 billion in 10-year savings.

Eliminating the nonprofit status for hospitals would generate $260 billion in 10-year savings. “More than half of all income by 501(c)(3) nonprofits is generated by nonprofit hospitals and healthcare firms,” the document notes.

On the state and local tax deduction front, the document floats a host of proposals ranging from entirely eliminating the deduction for both individuals and businesses — for an estimated $1 trillion in 10-year savings — to more targeted changes.

The list seems to be the work product of the committee’s 10 tax teams and spans healthcare, energy, tax credits, international trade, social welfare programs, education, finance and IRA funding.

“We don’t want to overreact, because it is a very broad options list just as the CBO report was, but once again tax-exempt bonds are on the table,” said Charles Samuels, attorney at Mintz who is counsel to the National Association of Health & Educational Facilities Finance Authorities.

“Unfortunately, nothing surprising in the options list,” Samuels said. “Anybody who is surprised hopefully has now received the proverbial two- by- four to  the side of the head and is aware of the challenge ahead.”