Disaster Assistance and Federal Subsidies for Municipal Bonds

Disaster Assistance and Federal Subsidies for Municipal Bonds

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September 26, 2017
Disaster Assistance and Federal Subsidies for Municipal Bonds
The destruction caused by Hurricanes Harvey, Irma, and
were established as temporary tax provisions. The relative
Maria to the Gulf Coast and Southeast regions has
appeal of TCBs and tax-exempt bonds to investors varies
prompted a discussion of possible ways for federal, state,
with bond interest rates, marginal tax rate and tax status of
and local governments to provide assistance to distressed
the investor, and underlying economic conditions.
homeowners and businesses. Past discussions have included
proposals that would alter the federal subsidies for bonds
Qualified Private Activity Bonds (Qualified PABs)
(debt instruments with a maturity date of more than one
Bonds that fail both public purpose tests are termed private-
year) issued by municipal (state and local) governments.
activity bonds (PABs) and are generally ineligible for tax-
This In Focus describes the current federal subsidies
exempt financing. However, there are some activities which
available for municipal bonds, summarizes previous
fail each test but which Congress considers to provide
changes to those programs that provided for disaster
substantial public benefits, such as water treatment facilities
assistance, and briefly touches on selected policy issues.
and airports. These activities may be allowed to be financed
with qualified PABs, which are tax-exempt. Some qualified
Current Law
PABs are subjected to an annual, state-specific issuance
Three types of municipal bonds receive federal support
cap, which was the greater of $100 per resident or $305.3
under current law: (1) tax-exempt bonds; (2) tax credit
million in 2017. Qualified PABs issued for several
bonds (TCBs); and (3) qualified private activity bonds
activities classified as private are not subject to this cap,
(qualified PABs). Table 1 provides the estimated federal
including bonds issued for government-owned facilities.
expenditures for each program from FY2016-FY2020.
Past Changes to Municipal Bond
Table 1. Estimated Tax Expenditures for Federal
Subsidies for Disaster Assistance
Bond Subsidies, FY2016-FY2020
Federal policymakers have not elected to modify the
(In billions of dollars)
statutes governing tax-exempt bonds in response to past
disasters, perhaps because any public purpose municipal
Subsidy
Expenditure
bond is automatically eligible for the tax exemption.
However, the federal government has modified both TCBs
Tax-Exempt Bonds
194.7
and qualified PABs in past disaster assistance efforts, as
Tax Credit Bonds
25.8
such bonds may provide relief from budgetary shortfalls
stemming from both decreased collections and increased
Qualified PABs
60.8
spending needs following natural disasters. For a
Source: Joint Committee on Taxation (JCT), Estimates of Federal
discussion of disaster relief programs administered across
Tax Expenditures for Fiscal Years 2016-2020, December 2016.
the federal tax code, see CRS In Focus IF10730, Tax Policy
and Disaster Recovery, by Molly F. Sherlock.
Tax-Exempt Bonds
Bonds are considered to be for a public purpose (or tax-
TCBs and Disaster Assistance
exempt) if they satisfy either of two criteria: (1) less than
Gulf Tax Credit Bonds (GTCBs) were designed to assist
10% of the proceeds are used directly or indirectly by a
state and local governments with the fiscal stress imposed
nongovernmental entity; or (2) less than 10% of the bond
by Hurricane Katrina in August and September 2005.
proceeds are secured by property used in a trade or
GTCBs were created by the Gulf Opportunity Zone Act
business. The federal government subsidizes tax-exempt
(GOZA; P.L. 109-135) in December 2005, and provided for
bonds by excluding their interest income from federal
issuances in all of calendar year 2006. Up to $350 million
income taxation. This lowers debt costs of state and local
in issuance authority was allocated across states, with up to
government by allowing them to borrow at interest rates
$200 million available to be issued by the state of
that are lower than they would be if the interest income
Louisiana, up to $100 million available to be issued by the
were taxable. Municipal governments can issue tax-exempt
state of Mississippi, and up to $50 million available to be
bonds without federal restriction.
issued by the state of Alabama.
Tax Credit Bonds (TCBs)
GTCBs were largely designed to help with fiscal
Tax credit bonds (TCBs) are an alternative to tax-exempt
responsibilities that pre-dated the arrival of Hurricane
bonds that provide a tax credit or direct payment
Katrina, as 95% of GTCB proceeds were required to be
proportional to the bond’s face value in lieu of the tax
used to make bond payments (other than private activity
exemption. The value of the TCB benefit (and subsequent
bonds) that were outstanding before Hurricane Katrina
federal cost) does not depend on the investor’s marginal
made landfall. The maturity length of GTCBs was much
income tax rate. All of the TCBs currently in circulation
shorter than that of many other TCBs, with a maximum
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allowable term of two years. GTCB credits were eligible to
Table 2. Ten-Year Revenue Estimates of Previous
be claimed against regular income tax liability and
Municipal Bond Changes for Disaster Assistance
alternative minimum tax liability.
(In billions of nominal dollars)
Midwest Disaster Bonds (MWDBs) were designated for
QPAB
Total
areas impacted by the severe storms that occurred between
Legislation
TCB Effects
Effects
Effects
May and August 2008. MWDBs were created by the
Emergency Economic Stabilization Act (EESA; P.L. 110-
GOZA
-0.057
-2.297
-2.354
343) in October 2008, which provided for up to $450
million in MWDB issuances for all of calendar year 2009.
EESA
-0.152
-1.320
-1.472
States with over 2 million affected residents (Indiana, Iowa,
Source: JCT, JCX- 89-05r and JCX-78-08.
and Wisconsin) were authorized to issue up to $100 million,
Notes: GOZA estimates were for FY2006-FY2015, while EESA
and those with between 1 and 2 million and (Illinois,
estimates were for FY2009-FY2018. EESA estimates do not include
Missouri, and Nebraska) could have issued $50 million.
revenue effects of bond subsidies for recovery from Hurricane Ike.
MWDBs proceeds were to be used to pay the principal and
Municipal Bonds and Disaster Assistance
interest on any outstanding state bonds or the bonds of any
affected political subdivision within the state. The proceeds
The implementation of federal subsidies for municipal
could also have been loaned to a jurisdiction for the same
bonds may generate considerations specific to disaster
purpose. The provision required the issuer to issue an equal
assistance policy. A discussion of general municipal bond
amount of general obligations for the same purpose, akin to
policy issues may be found in CRS In Focus IF10712, Key
a matching requirement. As with GTCBs, MWDBs had a
Issues in Tax Reform: Federal Subsidies for Interest Income
maximum term of two years.
Generated from Municipal Bonds.
Both TCBs and qualified PABs can include issuance
Qualified PABs and Disaster Assistance
restrictions across states and localities to ensure that federal
In addition to creating new TCBs, GOZA and EESA each
benefits associated with the respective program achieve a
temporarily expanded permissible qualified PAB issuances
desired allocation across areas. Examples include
for municipalities with disaster recovery responsibilities.
restrictions imposed on certain qualified PABs (dependent
Both laws temporarily allowed affected states to issue tax-
on population) and on Qualified Zone Academy Bonds
exempt bonds to finance (1) qualified activities involving
(dependent on the population below the poverty level).
residential rental projects, nonresidential real property, and
public utility property located in the disaster area; and (2)
There may also be a tradeoff between the timeliness of
below-market rate mortgages for low- and moderate-
federally subsidized municipal bond offerings and their
income homebuyers. The maximum amount of bonds that
effectiveness in targeting the populations most in need of
each state could issue under GOZA was $2,500 multiplied
assistance. Allowing for bond issuances relatively shortly
by that state’s population in the affected area prior to the
after a disaster may provide for more financial relief than
arrival of Hurricane Katrina. Under EESA, the maximum
bonds with a delay between the disaster and first issuance
amount of bonds each state could issue was $1,000
dates, but may also favor those who are more able to
multiplied by that state’s population in the disaster area, and
speedily claim benefits, particularly if the bond is subject to
established need-based prioritization for state allocations.
monetary issuance restrictions. A 2008 GAO report on
disaster assistance in the Gulf Coast region found that:
GOZA and EESA also allowed operators of certain low-
income residential rental projects to rely on the
For the most part ... eligible states allocated GO
representations of displaced individuals regarding their
Zone tax-exempt private activity bond authority
income qualifications so long as the tenancy began within
without consistently targeting the allocations to
six months of the displacement. Additionally, GOZA
assist recovery in the most damaged areas.
provided for one additional advance refunding of qualifying
There are budgetary control considerations that may be
bonds that were issued by affected states. Benefits provided
worth considering. TCBs are issued as either investor credit
for under EESA were also extended to Texas and Louisiana
TCBs or issuer direct payment TCBs. The implementation
to assist with recovery following Hurricane Ike.
of automatic enforcement measures (often described as
Table 2 shows 10-year JCT revenue estimates of municipal
“sequesters”), as provided for by the Budget Control Act of
bond changes included in GOZA and EESA. Subsidies for
2011 (P.L. 112-25), diminishes the credit rates of certain
municipal bonds in those laws were estimated to reduce
issuer direct payment TCBs through FY2021. For more
revenues by a combined $3.8 billion over 10 years.
details on the distinction between investor credit and issuer
direct payment TCBs, see CRS Report R40523, Tax Credit
Bonds: Overview and Analysis.
Grant A. Driessen, Analyst in Public Finance
Joseph S. Hughes, Research Assistant
IF10739

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Disaster Assistance and Federal Subsidies for Municipal Bonds

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