WASHINGTON – Tax-exempt governmental bonds will result in revenue losses to the federal government of $194.7 billion over the five fiscal years 2016-2020, the Joint Committee on Taxation estimated in a report this week.
The committee, in "Estimates of Federal Tax Expenditures for Fiscal Years 2016-2020," projected that over the same five years, the revenue losses would be $60.8 billion from private activity bonds, $16.0 billion from Build America Bonds and $1.4 billion from recovery zone economic development bonds and qualified school construction bonds.
The JCT revenue estimates play a critical role in tax and budget legislation, because lawmakers often want revenue losses to balance out with the revenue gains from provisions in an overall bill.
Tax-exempt municipal bonds are considered to be tax expenditures because the interest is excludable from gross income. Tax expenditures are defined as revenue losses attributable to provisions of the federal tax laws, which allow for a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability, according to the JCT.
The committee's document contains a chart that specifies revenue losses for each of the fiscal years 2016-2020, as well as the total for the five-year period, for each type of bond. The document also contains a list of expired and expiring tax expenditures.
The estimated revenue losses of $194.7 billion from governmental bonds for the five fiscal years ending in 2020 is much higher than the $187.7 billion in losses the JCT estimated for fiscal years 2015-2019.
George Friedlander, a managing partner at Court Street Group Research, said of these latest projections, "Those numbers have to be wrong because [the JCT has] the revenue losses going up when the amount of outstanding bonds has been going down and interest rates have been down."
Friedlander also takes issue with JCT's underlying assumption that, if tax-exempts didn't exist, investors would only buy fully taxed corporate bonds. He has pointed to studies by Joseph Poterba at MIT showing that muni investors would instead hold more cash or seek out alternative investments with lower federal tax rates.
JCT projected federal revenue losses of $16.0 billion for Build America Bonds, roughly $182 billion of which were issued in 2009 and 2010 the two-year period during which they could be issued. BABs are taxable bonds for which the Treasury Department pays issuers federal subsidies equal to 35% of their interest costs. The federal subsidy payments have been cut by sequestration during the past several years.
The PAB category with the highest estimated federal revenue losses is private nonprofit and qualified public education facilities, at $19.8 billion. The next highest is $13.5 billion for private nonprofit hospital facilities, followed by $7.1 billion for single family housing, $5.6 billion for multi-family housing, and $5.1 billion for private airports, docks, and mass-commuting facilities.
The JCT estimated federal revenue losses of $3.1 billion for student loans, $2.5 billion for sewage, water and hazardous waste facilities and $2.2 billion for small-issue PABs.
Also in the PAB category, the JCT estimated revenue losses of $700 million each for energy production facilities as well as highway projects and rail truck transfer facilities, $300 million for veterans' housing, and $100 million each for green buildings and sustainable design projects as well as high-speed intercity rail facilities.
The JCT projected $6.5 billion in revenue losses for qualified school construction bonds and $900 million for recovery zone economic development bonds.
It found the tax credits for holders of clean renewable energy bonds would result in federal revenue losses of $600 million over the five years. About $300 million of revenue losses were attributed to the tax credits for qualified energy conservation bonds by the JCT.
