WASHINGTON – The Internal Revenue Service's proposed definition of a political subdivision could jeopardize the tax-exempt bonds of many public entities in Minnesota, the state's congressional delegation recently told the agency and the Treasury Department.
In a letter penned to the Treasury and IRS last month, Minnesota's two Senators and eight House members said they are concerned that some of the state's port authorities, housing authorities and redevelopment authorities could lose the tax-exempt status of their bonds.
"We believe these widely respected entities should continue to be able to use tax-exempt bonds to appropriately further their missions," the delegation wrote. "Unfortunately, if the proposed rule were adopted without change, some of them could lose their status as political subdivisions, threatening the critical public work of those entities."
The two-page Aug. 25 letter, addressed to Treasury Secretary Jacob Lew and IRS Commissioner John Koskinen, was signed by Minnesota's two Senate Democrats, Amy Klobuchar and Al Franken, as well as House Democrats Collin Peterson, Timothy Walz, Betty McCollum, Keith Ellison, and Richard Nolan and House Republicans John Kline, Erik Paulsen, and Tom Emmer.
Under current provisions, entities are political subdivisions that can issue tax-exempt bonds if they have the right to exercise a substantial amount of one of at least three sovereign powers: eminent domain; taxation; or policing. The proposed rules would also require political subdivisions to also serve a governmental purpose "with no more than an incidental private benefit" and be governmentally controlled.
The delegation warned that both the "incidental private benefit" clause as well as the governmental control test are problematic. These requirements could prevent some entities from using tax-exempt financing for "widely supported economic development activities," the Senate and House members said in the letter.
"The proposed rule contains unclear provisions on the level of control elected officials or voters must have of a political subdivision," they wrote. "As a result, a number of Minnesota political subdivisions believe this provision could unfairly bar some transparent, accountable entities from using tax-exempt bonds to support critical local projects."
The Minnesota delegation is not the only group of lawmakers to voice their opposition to the proposed definition. Earlier this year, four Ohio congressmen told the IRS and Treasury that the proposed definition could jeopardize a $35 million terminal improvement project for Akron-Canton Airport.
The agencies received 132 comments during the public input period, many of which were in opposition to the proposed new definition of political subdivision. In addition, several market groups have called the proposed rules overly restrictive and have asked that they be withdrawn and, if necessary, re-proposed.
John Cross, Treasury's associate tax legislative counsel, told The Bond Buyer last month that the agencies would consider the comments "very carefully" before the rules are finalized. Cross did not estimate when that could happen, but said it might be a long-term project.
The rules were proposed following concerns over whether the current rules permit too much private control of some political subdivisions, Cross has said.
The Minnesota lawmakers acknowledged that concern, but warned against unintentional consequences.
"While we recognize your concern about certain entities that may be unfairly taking advantage of the current definition of political subdivision for private gain, we believe that it's critical to ensure that changes to current policy do not harm public bodies that provide vital community services," they said.
