County Leaders Not Giving Up Fight on Exemption Nixed in Tax Overhaul

A rural road in Texas

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They plan to make their case for “advance refunding” bonds as infrastructure discussions ramp up in Congress.

WASHINGTON — Restoring a refinancing option for municipal bonds and pushing for new federal dollars for rural infrastructure to flow to county governments, instead of just states, are two priorities county leaders intend to advocate for on Capitol Hill.

Local government groups lost a fight during last year’s Republican-led tax overhaul to salvage a federal income tax exemption for interest earned on “advance refunding” bonds, which state and local governments have commonly used in the past to refinance and restructure debt. Under the new tax law, advance refunding bonds issued after Dec. 31, 2017 are not eligible for the exemption.

But county leaders are now looking to the debate about a possible federal infrastructure package as a chance to make their case for reviving the tax break. Municipal bonds are one of the most common ways state and local governments borrow money to finance roads, waterworks and other infrastructure.

“We are going to be pushing for advance refunding,” said National Association of Counties executive director Matthew Chase.

The group kicked off its six-day 2018 legislative conference on Friday. About 2,000 attendees from around the U.S. are expected to be on hand at the event, which will include meetings and sessions with members of Congress, Cabinet secretaries and federal agency leaders.

Roy Brooks, a commissioner in Tarrant County, Texas, and NACo's current president, said that “the most pregnant issue right now” as county leaders visit D.C. and meet with lawmakers is probably infrastructure and the president’s recently issued public works plan.

“It’s a conversation starter,” Brooks said of Trump’s infrastructure proposal, which was released on Feb. 12.

The White House blueprint calls for $200 billion of federal funding that would mostly go to new grant programs. It aims to stimulate around $1.5 trillion of infrastructure investment over a decade when combining the federal funds with state, local and private dollars.

One of the proposed grant programs would target rural infrastructure, including roads, airports, water systems and inland waterways. The plan calls for $50 billion for these grants, with 80 percent of the funding distributed according to a formula to governors. The other 20 percent of the funds would go to “rural performance grants” states could apply for.

Chase said NACo would prefer some of this rural funding to go directly to counties, as opposed to funneling it through governors’ offices.

One variable in the formula that would guide the distribution of rural infrastructure dollars in Trump’s plan is rural lane-miles of road. (Population and policy objectives would also be factored in.)

In a state like Kansas, according to Chase, counties own about 90 percent of the roads.

“Why should the governor get the money for infrastructure if they own, literally, less than 8 percent of the roads?” he said. Chase added: “We like the concept of rural infrastructure, but the money should go to those levels of government that actually own the infrastructure.”

Brooks and two other county leaders—Greg Cox, NACo’s first vice president and a supervisor in San Diego County, California, and Mary Ann Borgeson, the group’s second vice president and a commissioner in Douglas County, Nebraska—told Route Fifty Friday it was too early to weigh in on specific parts of Trump’s plan they want to see adopted or discarded. “I don’t think we’re at that point yet,” Borgeson said.

“We’re still dissecting it,” Cox added.

Chase said NACo’s committees would further discuss the plan this weekend.

Borgeson, Brooks and Cox did all say that their counties had used advance refunding bonds previously.

“We’ve got to issue debt from time to time and we need to be able to take advantage of market opportunities to save money on defeasing those bonds, or paying off that debt,” Brooks said.

“When you take away our ability to do that, it’s going to cost us money,” he added.

Estimates presented last year as the tax law took shape showed that eliminating the income tax exemption for interest earned on municipal bonds would yield about $17.4 billion over 10 years for the federal budget—money that helped to offset tax cuts in the measure.

NACo, Chase said, supports a bipartisan bill in the U.S. House that would reinstate the tax-exempt status of advance refunding bonds. Rep. Randy Hultgren, an Illinois Republican, introduced the legislation in February. It currently has three Democratic and two Republican co-sponsors and has been referred to the Ways and Means Committee.

Other state and local government groups are also urging Congress to restore the advance refunding tax exemption. The National Association of State Treasurers last week sent a letter to congressional leaders taking this position and endorsing the Hultgren bill.

It’s generally understood that investors are willing to accept lower returns for debt when their interest earnings are tax-exempt. This, in turn, keeps borrowing costs lower for state and local issuers.

Whether a major infrastructure package will materialize this year is an open question.

Texas Sen. John Cornyn, the chamber's No. 2 Republican, suggested this week that time and other factors could make it challenging to pass such a bill in the months ahead. But he also did not rule it out and said he’d do everything he could to move the effort forward.

On Thursday, the Senate Environment and Public Works Committee held the first hearing in Congress on the president’s infrastructure proposal. The House Transportation and Infrastructure Committee has scheduled a hearing on the plan for next Tuesday.

Bill Lucia is a Senior Reporter for Government Executive’s Route Fifty and is based in Washington, D.C.

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