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1 1 (November 10, 2021)

handle is hein.crs/goveeui0001 and id is 1 raw text is: Congressional Research Service Informing the legislative debate since 1914 November 10, 2021 Federal Support for the Municipal Bond Markets Introduction Municipal bonds are debt securities issued by state, city, county, and other nonfederal government agencies to pay for capital projects, such as highways, airports, sewers, bridges, schools, hospitals, and other public goods for residents. The municipal bond market consists of more than an estimated 1.5 million types of bond issuances from more than an estimated 55,000 issuers. The U.S. market had a total of $3.2 trillion municipal bonds outstanding, at the end of June 2021, roughly 4.3% higher than the amount outstanding at the end of 2019 (the last quarter before the economic recession accompanying the COVID-19 crisis). This In Focus summarizes the federal tax and regulatory treatments of municipal bonds, summarizes recent legislative proposals to modify certain treatments, and discusses possible impacts that current treatments may have on the demand and supply of municipal bonds. Tax Preferences Tax preferences for municipal bonds subsidize state and local government borrowing costs for capital projects. Preferential tax treatment may compensate state and local taxpayers for benefits provided to nonresidents. Debt issuances to fund long-term projects may also better align the financial burden with the timing of benefits, thus allowing for more predictable state and local financial planning. The federal government subsidizes municipal debt issuances via three types of tax preferences: (1) a federal tax exemption on interest income for public purpose bonds, (2) the same tax exemption for selected bonds issued for private purposes, and (3) a federal tax credit offered in lieu of a tax exemption for bonds supporting certain activities. By increasing the investor's interest income net of taxes, these subsidies allow state and local governments to sell bonds at lower interest rates while remaining competitive with comparable bonds without a federal tax preference (taxable bonds). Tax-Exempt Bonds All interest income earned by an investor holding a bond issued for a public purpose, as defined in the federal tax code, is exempt from federal income taxation. Public purpose bonds generally meet either of the following criteria: (1) less than 10% of the proceeds are used directly or indirectly by a private (nongovernmental) entity, or (2) less than 10% of the bond proceeds are secured directly or indirectly by property used in a trade or business. Qualified Private Activity Bonds (QPABs) Private purpose bonds are any bonds that fail to meet either of the public purpose criteria and generally do not receive a federal tax preference. However, a federal income tax exemption is extended to certain bonds-qualified private activity bonds (QPABs)-issued for private purposes explicitly listed in federal statute (26 U.S.C. §141). QPABs are designed to support projects with a significant nongovernmental presence yet still serve a public benefit (e.g., a privately built toll road that eases highway congestion). Tax Credit Bonds (TCBs) The third preference is a tax credit attached to certain bonds that may be claimed in lieu of a federal tax exemption. For these tax credit bonds (TCBs), rather than a federal tax exemption on interest income earned, the investor receives a tax credit, a direct payment that is proportional to a TCB's face value. The value of the tax credit does not depend on the investor's marginal income tax rate, as is the case with tax-exempt bonds and QPABs. The authority to issue TCBs was repealed by P.L. 115-97, though previously issued TCBs still outstanding receive federal tax credits. Legislative Proposals Legislative proposals have been introduced every year that would change the tax treatment of municipal bonds. Stand- alone bills in recent Congresses would revive TCBs (e.g., S. 1308 and S. 1676), modify the list of activities eligible for QPABs (e.g., H.R. 1396 and S. 1499), and adjust the definition of public purpose activities eligible for tax- exempt bonds (e.g., H.R. 606 and S. 1242, 116th Cong.). Modifications to the tax treatment of municipal bonds were also included in the large infrastructure proposals in 2021. H.R. 3684, the Infrastructure Investment and Jobs Act, includes language that would expand the activities eligible for QPAB financing and increase the total amount of funding available for certain purposes. Additionally, in September 2021, the House Ways and Means Committee marked up language for H.R. 5376-the Build Back Better Act-that would reinstate TCB issuance authority and establish a new TCB for infrastructure projects, allow for advance refunding of tax-exempt bonds, and make a number of modifications to QPAB activity. More recent versions of H.R. 5376 have not included bond preference modifications. For more on the bond proposals in H.R. 5376, see CRS Report R46923, Tax Provisions in the Build Back Better Act: The House Ways and Means Committee 's Legislative Recommendations. Market Liquidity and Disclosure Issues Municipal bonds tend to be most actively traded in the primary market, the market where they are newly issued. According to the Securities and Exchange Commission (SEC), one-third of municipal bonds trade once after initial issuance; the remaining bonds trade two or three times ittps://Crsreports.congress.gt

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