Support Legislation to Restore Tax-Exempt Status of Advance Refunding Bonds

Action Needed

Urge your Members of Congress to support the Investing in Our Communities Act (H.R. 1837), the LOCAL Infrastructure Act (S. 1453) and the Local Infrastructure Financing Tools (LIFT) Act (H.R. 8396), all of which would restore the tax-exempt status of advance refunding bonds.

Background

Tax-exempt bonds are a well-established financing tool written into the first tax code in 1913. They are predominantly issued by state and local governments for government infrastructure and capital needs purposes, such as the construction or improvement of schools, streets, highways, hospitals, bridges, water and sewer systems, ports, airports and other public works. 

Prior to 2017, advance refunding bonds were also tax-exempt and allowed counties to refinance municipal bonds once over the lifetime of the bond. Advance refunding bonds, when tax-exempt, allow state and local governments to lower borrowing costs and take advantage of more favorable interest rates. This frees up resources to be used for other important capital projects and minimizes costs to taxpayers. Advance refunding bonds also allow localities to address problematic bond terms and conditions or to restructure debt service payments for budget flexibility.  

On December 23, 2017, President Trump signed the Tax Cuts and Jobs Act (P.L. 115-97), the first major rewrite of the tax code since 1986. While the final bill retained tax-exempt status for municipal bonds, it eliminated the tax-exempt status of advance refunding bonds.

Prior to this elimination, advance refunding bonds made up about a third of the municipal bond marketplace, with over $475 billion in advance refunding bonds issued between 2012 and 2017. Over that time frame, municipalities saved more than $14 billion in taxpayer money through this financing tool.  

In March 2023, a bipartisan group of U.S. Representatives led by Rep. David Kustoff (R-Tenn.) and House Municipal Finance Caucus co-chair Rep. Dutch Ruppersberger (D-Md.) introduced the Investing in Our Communities Act (H.R. 1837) and in May 2023, a bipartisan group of U.S. Senators led by Sens. Roger Wicker (R-Miss.) and Debbie Stabenow (D-Mich.) introduced the LOCAL Infrastructure Act (S. 1453). Both bills would restore the tax-exempt status of advance refunding bonds, allowing state and local governments to better respond to market conditions and reduce taxpayer burden. Introduced in May 2024, the LIFT Act (H.R. 8396) would also restore the tax-exempt status of advance refunding bonds, as well as increase the small issuer exception on bank-qualified debt from $10 million to $30 million. As counties continue to implement the investments in our communities made through the American Rescue Plan Act, Bipartisan Infrastructure Law and the Inflation Reduction Act, restoring this critical financial management tool is critical to future capital investments.

Key Talking Points

• A fundamental feature of the first federal tax code from 1913, tax-exempt financing is used by state and local governments to raise capital to finance capital improvements and other projects, including infrastructure facilities that are vitally important to sustained economic growth 
• Between 2012 and 2022, counties, localities, states and state/local authorities financed $3.3 trillion in infrastructure investments through tax-exempt municipal bonds 
• Advance refunding bonds allow local governments to be good stewards of taxpayer dollars and should also be tax-exempt.  Advance refunding bonds accounted for roughly one third of the municipal bond marketplace from 2012-2016.  
• Advance refunding bonds save counties and taxpayers money. States and municipalities issued $457 billion in advance refunding bonds from 2012 to 2017, saving more than $14 billion.