The impact of the Tax Cuts and Jobs Act on the true interest cost of bank-qualified tax-exempt bond issues

Abstract

Purpose

The Tax Cuts and Jobs Act of 2017 (TCJA) substantially lowered the corporate tax rate, making tax-exempt municipal bond issues less attractive investments for banks, savings and loan associations and insurance companies. To provide a benefit for small issuers the current Internal Revenue Code has a special provision that allows banks and S&Ls to deduct 80% of the borrowing costs for “bank-qualified” bonds – tax-exempt bonds from issuers who issue no more than $10 million in bonds during a year. This study examines whether the relationship between the true interest cost (TIC) on bank-qualified bonds and other tax-exempt bonds changed with the passage of the TCJA.

Design/methodology/approach

Using linear regression analysis this paper compares the TIC of bank-qualified bonds with the TIC of bonds not bank-qualified using a sample of bonds both before and after the passage of TCJA.

Findings

Prior to the passage of the TCJA, this study observes that these “bank-qualified” bond issues had a lower true interest cost than other tax-exempt bond issues; however, after passage of the TCJA, the difference in the true interest cost between “bank-qualified” bond issues and other tax-exempt bond issues dramatically decreased.

Practical implications

It appears that the benefit for small bond issuers is greatly reduced after corporate tax rates were significantly lowered. If federal lawmakers wish small issuers to have the same advantage over other tax-exempt municipal bond issuers after passage of TCJA, some changes will need to be made to the Internal Revenue Code to give small issuers an additional advantage when issuing tax-exempt debt.

Originality/value

No other empirical research to date has examined the impact of TCJA on bank-qualified bond issue interest cost.

Citation

Benson, E.D. and Marks, B.R. (2024), "The impact of the Tax Cuts and Jobs Act on the true interest cost of bank-qualified tax-exempt bond issues", Journal of Public Budgeting, Accounting & Financial Management, Vol. 36 No. 4, pp. 471-489. https://doi.org/10.1108/JPBAFM-09-2023-0158