US tax bill threatens PPPs

A plan passed by the House would eliminate tax-exempt private activity bonds, a popular tool for financing public-private partnerships.

The tax reform bill passed by the US House of Representatives last week contains a poison pill for advocates of public-private partnerships: the elimination of tax-exempt private activity bonds.

Private activity bonds, which are issued by state and local governments on projects with a perceived public benefit, have helped spur major infrastructure PPPs across the country. Virginia’s I-66 project, for example, was approved for up to $946 million in private activity bonds. New York’s Goethals Bridge replacement PPP and Maryland’s Purple Line were allocated $461 million and $313 million in PABs, respectively. New York’s LaGuardia Airport modernisation PPP is being financed with $2.5 billion in PABs.

Eliminating tax-exempt PABs would drive up the cost of PPPs and make them a less appealing procurement method for governments.

“The House bill, as it is currently constituted, would be a major blow for P3s,” Steve Park, who heads Ballard Spahr’s P3/infrastructure group, told Infrastructure Investor. “The more expensive P3s get, the less likely governments are going to turn to them as an option.”

While PABs have been used to boost infrastructure projects, they are also issued for projects such as schools, universities and hospitals. To critics, the bonds are a market-skewing giveaway to colleges and for-profit companies.

The fate of the tax-exempt bonds remains unclear. Although the House plan called for their elimination, the bill being considered in the Senate maintains them. How the two branches reconcile their visions will decide whether PABs remain or are eliminated.

“There is a lot of concern, certainly,” Park said. “Where everyone is concerned is that the Senate, even though it didn’t have [elimination of the PABs] in its bill, may give on this.”

Both the House and the Senate are controlled by Republicans. Democrats have criticised the House’s move on PABs; a report from Democrats on the Joint Economic Committee called PABs “a critical source of funding for a wide array of infrastructure projects” and claimed eliminating them threatens 3 million jobs over the next 10 years.