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1 1 (September 26, 2017)

handle is hein.crs/govcgvs0001 and id is 1 raw text is: &~ ~ riE SE .$rCh &~ ~ ~ September 26, 2017 Disaster Assistance and Federal Subsidies for Municipal Bonds The destruction caused by Hurricanes Harvey, Irma, and Maria to the Gulf Coast and Southeast regions has prompted a discussion of possible ways for federal, state, and local governments to provide assistance to distressed homeowners and businesses. Past discussions have included proposals that would alter the federal subsidies for bonds (debt instruments with a maturity date of more than one year) issued by municipal (state and local) governments. This In Focus describes the current federal subsidies available for municipal bonds, summarizes previous changes to those programs that provided for disaster assistance, and briefly touches on selected policy issues. Three types of municipal bonds receive federal support under current law: (1) tax-exempt bonds; (2) tax credit bonds (TCBs); and (3) qualified private activity bonds (qualified PABs). Table 1 provides the estimated federal expenditures for each program from FY2016-FY2020. Table I. Estimated Tax Expenditures for Federal Bond Subsidies, FY2016-FY2020 (In billions of dollars) Subsidy Expenditure Tax-Exempt Bonds 194.7 Tax Credit Bonds 25.8 Qualified PABs 60.8 Source: Joint Committee on Taxation (JCT), Estimates of Federal Tax Expenditures for Fiscal Years 2016-2020, December 2016. Taxxmt, n~ B ctx,- Bonds are considered to be for a public purpose (or tax- exempt) if they satisfy either of two criteria: (1) less than 10% of the proceeds are used directly or indirectly by a nongovernmental entity; or (2) less than 10% of the bond proceeds are secured by property used in a trade or business. The federal government subsidizes tax-exempt bonds by excluding their interest income from federal income taxation. This lowers debt costs of state and local government by allowing them to borrow at interest rates that are lower than they would be if the interest income were taxable. Municipal governments can issue tax-exempt bonds without federal restriction. Tax 0re,,ika ,,,d , Tax credit bonds (TCBs) are an alternative to tax-exempt bonds that provide a tax credit or direct payment proportional to the bond's face value in lieu of the tax exemption. The value of the TCB benefit (and subsequent federal cost) does not depend on the investor's marginal income tax rate. All of the TCBs currently in circulation were established as temporary tax provisions. The relative appeal of TCBs and tax-exempt bonds to investors varies with bond interest rates, marginal tax rate and tax status of the investor, and underlying economic conditions. QuaV rvaito, AcA,*vizv Bc'-\ (QPd~A~&t Bonds that fail both public purpose tests are termed private- activity bonds (PABs) and are generally ineligible for tax- exempt financing. However, there are some activities which fail each test but which Congress considers to provide substantial public benefits, such as water treatment facilities and airports. These activities may be allowed to be financed with qualified PABs, which are tax-exempt. Some qualified PABs are subjected to an annual, state-specific issuance cap, which was the greater of $100 per resident or $305.3 million in 2017. Qualified PABs issued for several activities classified as private are not subject to this cap, including bonds issued for government-owned facilities. Federal policymakers have not elected to modify the statutes governing tax-exempt bonds in response to past disasters, perhaps because any public purpose municipal bond is automatically eligible for the tax exemption. However, the federal government has modified both TCBs and qualified PABs in past disaster assistance efforts, as such bonds may provide relief from budgetary shortfalls stemming from both decreased collections and increased spending needs following natural disasters. For a discussion of disaster relief programs administered across the federal tax code, see CRS In Focus IF 10730, Tax Policy and Disaster Recovery, by Molly F. Sherlock. TCIRs wi,.d U',*m,_,,, e,- .\\-tac:.' .,: Gulf Tax Credit Bonds (GTCBs) were designed to assist state and local governments with the fiscal stress imposed by Hurricane Katrina in August and September 2005. GTCBs were created by the Gulf Opportunity Zone Act (GOZA; P.L. 109-135) in December 2005, and provided for issuances in all of calendar year 2006. Up to $350 million in issuance authority was allocated across states, with up to $200 million available to be issued by the state of Louisiana, up to $100 million available to be issued by the state of Mississippi, and up to $50 million available to be issued by the state of Alabama. GTCBs were largely designed to help with fiscal responsibilities that pre-dated the arrival of Hurricane Katrina, as 95% of GTCB proceeds were required to be used to make bond payments (other than private activity bonds) that were outstanding before Hurricane Katrina made landfall. The maturity length of GTCBs was much shorter than that of many other TCBs, with a maximum N.: z:O&X:2$' ~.Ct fl:OC~qK~'$ p\w -- , gnom goo mppm qq\ a , q 'S I 11LULANJILiN,

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