Federal tax law generally prohibits the use of federal guarantees in connection with tax-exempt obligations on the grounds that the dual subsidy is inefficient and creates a security with superior investment attributes to direct Treasury obligations. One of the potential instruments in a federal credit program is a standby line of credit, which represents a contingent commitment by the federal government to make a junior-lien loan to a project sponsor to cover shortfalls, including debt service on tax-exempt project bonds.
Under the Internal Revenue Code, a standby line of credit may be construed as a federal guarantee, thus precluding its use in connection with tax-exempt obligations. As a significant portion of the projects seeking to utilize federal lines of credit may be eligible for tax-exempt financing based on the purpose and security of the bonds, this provision could hinder these effectiveness of the federal credit instruments.
This appendix suggests a revision to Section 149 of the Internal Revenue Code to provide that a standby line of credit would not be deemed a federal guarantee for tax purposes. The tax code would need to be amended directly in order to effectuate this change. It would not be sufficient to place a provision in the transportation authorization legislation dealing with the tax treatment of standby line.
Section 149(b) of the Internal Revenue Code provides that tax-exempt status shall not apply to any bond for which principal or interest payments are guaranteed directly or indirectly (in whole or in part) by the United States. Congress has recognized that important public policy goals merit a waiver from the blanket prohibition contained in Section 149. It has provided specific carve-outs for more explicit federal guarantees, such as bonds that fund mortgage loans guaranteed by government-sponsored enterprises and federal agencies including the Federal Housing Administration, Veterans Administration, Federal National Mortgage Administration, Federal Home Loan Mortgage Corporation, and Government National Mortgage Association. It has also exempted bonds funding student loans guaranteed by the Student Loan Marketing Association, certain bond-funded small business and multi-family loans, and guarantees of electric power bonds by the Bonneville Power Authority.
The tax code change would address the federal guarantee issue by adding to the enumerated list of exceptions any lines of credit provided by DOT for surface transportation facilities pursuant to a new federal credit program.
The Treasury Department and Joint Committee on Taxation each perform a fiscal impact analysis of all proposed tax code changes to determine their effect on the federal deficit. Tax-exempt bonds have a tax expenditure associated with them because the Treasury foregoes the receipt of income taxes on the interest received by bondholders. To the extent a tax code provision stimulates the issuance of additional tax-exempt debt compared to a baseline case, the Treasury calculates a revenue loss.
Allowing projects to use federal standby lines of credit should make it easier to finance large start-up transportation investments. Under current tax law, most of these facilities are eligible to be financed with tax-free governmental purpose bonds in any case, so there should not be a large induced volume of new tax-exempt debt issued.
However, by facilitating the financing of such projects, the measure could expedite the issuance date of tax-exempt bonds, which would result in earlier tax expenditures to the Treasury. On the other hand, a bond issue benefiting from a federal line of credit may not need to capitalize interest for as long a period as otherwise would be the case, and may be able to reduce bond-funded reserves. Reduced capitalized interest and reserve requirements would result in smaller tax-exempt debt issues than is presently the case. To the extent that standby lines of credit succeeded in reducing tax-exempt financing requirements versus the baseline, the Treasury would benefit. The difference is assumed to be invested in like-rated taxable bonds. The Treasury would receive tax receipts from the interest paid on those bonds.
On balance, the effects of a somewhat accelerated issuance should be offset by somewhat smaller tax-exempt issuance requirements, and the proposal is likely to be largely revenue neutral to the Treasury.
Purpose: To amend the Internal Revenue Code of 1986 to clarify that standby lines of credit provided by the Department of Transportation do not constitute federal guarantees.
SECTION __. FEDERAL GUARANTEES. Section 149(b)(3) of the Internal Revenue Code of 1986 (relating to certain exceptions to federally guaranteed bonds not being tax-exempt) is hereby amended by striking the word "or" at the end of subsection (b)(3)(ii), and by striking the period at the end of subsection (b)(3)(iii) and inserting
" , or (iv) lines of credit provided by the Department of Transportation pursuant to (insert legislative reference to federal credit program)."
