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Public power urges IRS to scrap proposal that could threaten tax-exempt funding

The American Public Power Association, or APPA, is once again guarding its members' ability to access tax-exempt municipal bonds, this time by urging the Internal Revenue Service to scrap a proposed rule defining which entities qualify to issue those bonds.

Public power producers use tax-exempt municipal bonds to fund infrastructure projects and for other financing purposes. The industry fears an IRS rule that the Obama administration proposed in February 2016 could impede the ability of public utilities and other "political subdivisions" of state and local governments to issue those bonds. The IRS crafted the proposal in response to perceived abuses of tax-exempt bonds by private developers in Florida that resulted in IRS enforcement action.

Among other things, the proposed rule would add two requirements for political subdivisions with respect to tax-exempt bonds: that the subdivisions serve a governmental purpose and that they provide "no more than an incidental benefit to private persons."

APPA said the governmental purpose requirement could "open the door to the federal government dictating or at least second guessing the governmental/public purpose of state and local entities," shifting that authority to the IRS. The group was also troubled by the private benefit language, which APPA said was not clearly defined and could prohibit some public power entities from relying on tax-exempt bonds if some of their infrastructure or electric output serves private companies.

"Many basic public infrastructure projects provide some range of benefits to private parties, commercial entities and industrial businesses," APPA President and CEO Sue Kelly said in comments submitted to IRS Commissioner John Koskinen in May 2016.

The IRS took comments on the proposal in 2016 but has never issued a final rule. Under the Trump administration, the U.S. Treasury Department, of which IRS is a part, identified the rule as one of eight that must be reviewed for potential changes or repeal as part of an April 21 executive order from the White House designed to reduce tax regulatory burdens.

In an Aug. 3 letter to Koskinen regarding the regulatory review, Kelly asked that the proposed regulation be "withdrawn in [its] entirety," adding that the changes "would have a cascading and disruptive effect throughout the federal tax system."

The proposed rule is not the only potential threat to tax-exempt municipal bonds for utilities. APPA and other industry groups have urged lawmakers not to scrap tax exemptions for municipal bonds as part of a tax reform package that Congress is expected to roll out in 2017. The bonds help spur around $11 billion annually in new public power infrastructure and have a very low default rate, according to APPA,.