July 24, 2014

Fiscal Cliff Legislation's Impact on Tax-Exempt Bonds

The exclusion from gross income of interest paid on tax-exempt bonds, including both traditional governmental bonds and private activity bonds, is largely unaffected by the fiscal cliff legislation. In fact, except for the inclusion of some specific extender provisions regarding certain tax credit and private activity bonds, the legislation does not address tax-exempt bonds.

While that is good news for both issuers of, and investors in, tax-exempt bonds, the exclusion from gross income of interest paid on tax-exempt bonds could still be targeted if comprehensive tax reform becomes a reality. While the most likely change for tax-exempt bonds to surface recently is a proposed cap on overall deductions/tax benefits for wealthy taxpayers, other changes that have been suggested and might resurface in further negotiations include a reduction in the types of projects that could be financed with private activity bonds or a further limitation on advance refunding transactions.

For issuers of direct pay tax credit bonds, the fiscal cliff legislation postpones the threat to the federal subsidy payments that would have decreased had sequestration gone into effect. Under the fiscal cliff legislation, the sequester (including the federal subsidy payments to issuers) would be implemented on March 27, 2013 if Congress were not able to come to an agreement on a deficit reduction plan.

© 2014 Bracewell & Giuliani LLP

About the Author


Charles focuses his practice on federal taxation issues, including tax controversies and transactional planning, with an emphasis on the federal tax treatment of state and local government bonds of all types. He also has experience in federal income and excise tax matters in areas such as transactional planning, general federal tax advice and tax-controversy matters affecting business organizations, non-profit organizations, cooperative organizations, and state and local governments.

He regularly represents clients on federal income tax matters under...


About the Author

Steven H. Gerdes, Tax Attorney, Bracewell & Giuliani Law Firm

Steve focuses his practice on the tax aspects of state and local government obligations. During his career, he has covered the full range of tax-exempt obligations appearing in the marketplace, including governmental new money, commercial paper and working capital financings, and current and advance refundings. These transactions also include exempt facility bond financings such as seaport and airport financings, student loan financings, solid waste and sewage financings, single- and multi- family housing financings, as well as professional sports facility and development district...

R. Todd Greenwalt, Tax Attorney, Bracewell & Giuliani Law Firm

Todd's practice focuses on governmental entities and tax-exempt organizations, advising clients with regard to tax-exempt financings and other business transactions, and resolving tax-exempt status issues.


About the Author

Victoria Ozimek, Tax Attorney, Bracewell Giuliani Law Firm

Victoria Ozimek's practice focuses on advising clients regarding the tax aspects of the issuance of tax-exempt and tax credit obligations. Victoria serves as tax counsel on governmental and conduit financings, where she works with issuers and borrowers to review and structure proposed new money and refunding obligations. She also assists issuers with post-issuance compliance matters.


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