The Tax Cuts and Jobs Act that Congress passed in December of last year changes how cities and towns operate but may also bring ripple effects.
Here are three perspectives:
Ray Jones, Partner, and Emily Zackon, Associate, Parker Poe
The Tax Cuts and Jobs Act enacted on December 22, 2017, had several immediate impacts that affect municipalities.
The first impact is a restriction on the ability to refinance outstanding bonds. Prior to the passage of the act, municipalities could generally issue tax-exempt bonds for the purpose of refinancing prior bonds at any time rates were favorable and savings could be achieved. Even though most municipal bonds carry a fixed "redemption date" (i.e. the first date on which they can be prepaid), the prior regulations permitted a refinancing more than 90 days prior to the redemption date so long as certain rules were met — an "advance refunding." The prior regulations also permitted a refinancing within 90 days of the redemption date under a slightly less complicated set of rules — a "current refunding."
Unfortunately, as of December 31, 2017, the act prohibits advance refundings (current refundings are still allowed). Market participants are seeking alternatives to this prohibition. However, with most market participants expecting interest rates to rise, the ability to achieve savings through bond refinancing will be reduced.
The second impact of the act is a wave of upward interest rate adjustments on bank-held bonds. Because the act reduced corporate income tax rates, banks assign less economic value to tax-exempt bonds and, if they reserved the right to do so, are increasing rates on municipal bonds in an attempt to regain the expected level of economic value.
Finally, lower tax rates diminish the value to all investors holding tax-exempt bonds. Accordingly, investors are requiring a higher return (meaning higher borrowing costs for municipalities).
In response to the act, municipalities should work with their municipal advisors to craft alternative borrowing strategies to address these impacts.
Irma Esparza Diggs, Director of Federal Advocacy for the National League of Cities
While we saw some setbacks in the final tax bill, there's no ignoring the fact that the advocacy efforts of hundreds of local leaders were instrumental in moving the needle and making a bad bill better. More than 40 South Carolina mayors helped advocate on behalf of cities by signing a delegation letter last fall.
Local advocacy efforts successfully thwarted attempts to eliminate qualified private activity bonds, key tax credits for city development, and the state and local tax deduction, commonly called SALT.
From the get-go, we prevented the tax exemption for municipal bonds from ever being on the chopping block and helped push for the partial preservation of the SALT deduction. Still, the bill targets local governments' flexibility to raise revenues and may pose challenges for cities in the future.
In addition to the loss of the advance refunding bond, another challenge is the new $10,000 cap on the SALT deduction. While its usage varies per community, the SALT deduction softens the impact felt by families from state and local tax rate increases. Capping the deduction will likely make it more politically challenging for states and cities to raise local tax rates.
We are also continuing to monitor how reductions to the corporate tax rate may impact the favorability of tax-exempt debt, such as municipal bonds. Individual tax rates were modestly reduced, so we haven't seen major shifts in the markets, but the topic continues to generate buzz.
Moving forward, cities and towns should be on the lookout for how their state legislatures will react to federal tax reform. Many statehouses will take this opportunity to make adjustments to their own tax codes, and cities and towns need to be a part of those discussions.
Finally, cities and stakeholders should continue to monitor how the Internal Revenue Service proceeds in fully interpreting these changes. Passing the law was one thing, implementing it is another.
Renee Kuhlman, Director of Policy Outreach, National Trust for Historic Preservation
The National Trust for Historic Preservation and our preservation partners are very pleased the Historic Tax Credit was retained in the Tax Cuts and Jobs Act. Without the HTC, hundreds of rehabilitation projects around the country would not be financially feasible and moving forward.
Widespread agreement that the Historic Tax Credit should be retained among those working to revitalize towns across South Carolina led to a strong advocacy push across the state.
For example, the Municipal Association of South Carolina worked with 27 mayors to send a letter to the South Carolina congressional delegation requesting that they keep the credit.
Both Senators Tim Scott and Lindsey Graham showed great leadership in their support of the historic tax credit and historic preservation generally during the tax reform debate. For example, Sen. Scott, along with four other members of the Senate Finance Committee, amended the bill to include the Historic Tax Credit at 20 percent.
Now for the second time in 30 years, Congress has reaffirmed that reviving older and historic buildings is sound federal policy and good for the nation. For the foreseeable future, the Historic Tax Credit will remain a permanent part of the tax code, where it will continue to create jobs and fuel the revitalization of downtowns, neighborhoods and Main Streets across America.
Despite successful advocacy, the HTC was not retained in its original form. The historic credit must now be taken over a five year period, and that lessens its value. So the National Trust is encouraging preservationists to review their state historic tax credits as well as other state and local funding opportunities to see if opportunities exist to help make up for that lost value.
We are also encouraging members of Congress to co-sponsor the Historic Tax Credit Improvement Act, (S425/HR1158) which has enjoyed strong bipartisan support during this Congress. One provision calls for reducing the basis adjustment requirements which would add value to the credit. Under current law, the basis — or the costs associated with the building — must be reduced by the full amount of the historic tax credits received. One way to increase investor interest in historic tax credits is to eliminate the requirement that the basis be reduced by the amount of the credit.
We are grateful that Congress retained the Historic Tax Credit, and through this incentive, we expect to see continued reinvestment back into the hearts of our communities.
South Carolina stats
Between 2002 and 2016, the Historic Tax Credit helped finance the rehabilitation of 107 commercial properties in South Carolina, leveraging more than $358 million in total investment.
Incentives driven by the use of the federal Historic Tax Credit have increased historic rehabilitation redevelopment across the state.
South Carolina projects that relied on the HTC include the following:
- the Hotel Florence, which catalyzed the redevelopment of downtown and brought businesses back to town as a result;
- the Bleachery in Rock Hill, where a former textile mill is being renovated for office, retail and recreation use;
- the Trolley Barn in Charleston, which now houses the American College of the Building Arts;
- the former General Asbestos and Rubber Co. in North Charleston, which will be transformed for office and restaurant use; and
- new housing that has been created in Brandon Mill (1899 – 1918) in Greenville, Apalache Mill (1888 – 1946) in Spartanburg, and the Palmetto Compress building (1917 – 1924) in Columbia.