WASHINGTON — President Obama's fiscal 2016 budget proposals to simplify federal tax laws pertaining to municipal bonds are good, but the Treasury should take further action to simplify private business use rules, a public power group told the department.
American Public Power Association president and chief executive officer Sue Kelly made the remarks in a letter sent to Treasury associate tax legislative council John Cross on March 30.
APPA said it strongly supports the proposal in Obama's budget to repeal the 5% unrelated or disproportionate private business use test.
Under federal tax law, bonds generally are private-activity bonds if more than 10% of the proceeds are used for private business and more than 10% of the debt service is paid from or secured by private parties. The threshold for the tests can be reduced to 5% if the private business use is either "disproportionate or unrelated" to the bonds' governmental purpose.
APPA said that the unrelated or disproportionate private business use test "involves vague factual determinations" and "creates undue complexity." It agrees with the Treasury that the 10% limits are generally sufficient and workable thresholds.
The organization also said it supports Obama's proposal to simplify the arbitrage investment restrictions for tax-exempt bonds.
The proposal would rely on arbitrage rebate requirements as the main type of restrictions and would generally repeal the yield-restriction requirements. It would also "provide a broader streamlined three-year spending exception to arbitrage rebate for tax-exempt bonds" that meet certain requirements, according to Treasury's Greenbook explanations of revenue proposals in the budget request. In addition, Obama would increase the small-issuer exception to the arbitrage rebate requirements to $10 million from $5 million and index that limit to inflation.
"We fully agree with Treasury that the investment yield and arbitrage rebate restrictions are duplicative and that these dual restrictions create an unnecessary compliance burden for state and local governments," Kelly wrote.
But APPA would like to see two additional changes to private business use rules, she said.
One would be to repeal the $15 million private business use and payments limitation on certain output facilities that are part of the same project, the APPA said.
Currently, bonds used to finance certain output facilities are PABs if more than $15 million of the proceeds are used for private business and debt service on more than $15 million of proceeds is paid for, or secured by, private parties.
Kelly wrote that the limitation "is a punitive rule which singles out governmentally-owned electric output facilities from other bond financed governmental owned assets and systems."
"At a time in which additional electric output, smart-grid transmission and distribution facilities are needed to meet a rising energy needs, the repeal of this per-project limitation would provide APPA members with needed operational flexibility in a manner consistent with the Administration's energy policy," she wrote. "For example, removal of this limitation would more easily permit public power providers to transmit renewable energy generated at remote locations to their own customers and to the customers of other utilities."
APPA also wants a repeal of a federal tax code provision that provides a maximum $15 million limit on private use and payments for all tax-exempt government bonds unless the volume cap is allocated to any excess amount. Kelly wrote that it "creates undue complexity for municipal issuers and interferes with a policy goal of creating a bright line 10 percent private business use test."
