Among the casualties of the Trump administration’s proposed tax system overhaul is a type of tax free municipal bond—the private activity bond—that has been utilized to finance a variety of public-sector projects, including hospitals, university and community college facilities and low-income housing.
The Republican tax reform package would eliminate the popular program, which allows tax-exempt municipal bonds to be issued on behalf of a government for a project built and paid for by a private developer.
“This would have huge ramifications across the state and the country,” says Ty Carlos, executive director of the Louisiana Community Development Authority, which issues bonds on behalf of local and municipal governments as well as nonprofit organizations. “This could have a significant impact on entities all across the state.”
Carlos and other members of the bond community—including his counterparts across the country—were blindsided by the omission of the private activity bond from the GOP tax plan, which appears to be on a fast track through Congress. According to Governing magazine, GOP leaders and administration officials have said for months that the muni bonds were safe and would not be eliminated from the tax proposal.
Though private activity bonds are a tool that help stimulate development within the private sector, which the Trump administration has touted as one of the cornerstones of its economic policy, eliminating the bonds would save the federal government money, at least from a short term, dollar-for-dollar perspective. The government loses out on collecting tax revenues from the interest the bonds earn for investors.
For Louisiana, a variety of projects could be affected, especially those done through public-private partnerships.
“A lot of hospitals, universities and technical colleges have nonprofit arms that do their development and they use these bonds to finance their buildings,” Carlos says. “Nonprofits that do multifamily housing would also be impacted.”
Since it began operating in 1997, the LCDA has issued more than $6 billion in public financing for infrastructure and economic development projects. Though Carlos could not say how many of those bonds were private activity bonds, nationwide as much as 20% of the $3.7 trillion municipal bond market is made up of private activity bonds, Municipal Markets’ Analytics Matt Fabian tells Governing magazine.
Committee of 100 CEO Michael Olivier says doing away with the private activity bonds could hamper economic development, especially for projects that don’t have any other sources of funding. C100 is Louisiana’s business roundtable and includes CEOs of the state’s largest companies.
“They’ve really become a staple in the market,” Olivier says.
Both Olivier and Carlos only learned of the proposed elimination of the bond program Monday. Carlos reached out to LCDA members later that day and urged them to get in touch with members of the state’s Congressional delegation.
“All we can do is reach out to our federal representatives and voice our concerns,” he says.
—Stephanie Riegel
