Congress last week left $1.5 trillion in deficit reductions over 10 years to be sorted out by a dozen lawmakers. Speculation quickly focused on how cuts could be squeezed from government payments to hospitals and doctors.
On the chopping block
Municipal bonds could be seen as part of deficit fix
Not-for-profit hospitals, however, could see another financial challenge emerge from the select committee charged with drafting the deficit-reduction plan by Thanksgiving, healthcare finance experts said.
Tax-exempt municipal bonds, one major source of capital for hospital construction, technology and other major investments, may be under scrutiny should the committee consider tax reforms to raise revenue. The Joint Committee on Taxation estimates the federal cost of hospital tax-exempt bonds totaled $1.8 billion in 2010. Meanwhile, the Office of Management and Budget said the lost revenue totaled $3.5 billion last year and another $3.6 billion this year. Between 2012 and 2016, the amount is expected to total $26.8 billion, the OMB said.
The American Hospital Association in July said the trade group was tracking municipal bond tax exemption in the talks to raise the nation's debt ceiling. In an interview last week, Michael Rock, senior associate director of federal relations for the AHA, said, “I think it will be discussed and considered” by the Joint Select Committee on Deficit Reduction.
Tax breaks, including those for investors who buy government and not-for-profit bonds, have been singled out as one possible fix by lawmakers in both parties and by policy experts, most notably by the National Commission on Fiscal Responsibility and Reform last year (Nov. 15, 2010, p. 6) .
“We need to act as if it's a concrete possibility,” given the level of interest and the urgency of deficit talks, said Chuck Samuels, an attorney with Mintz, Levin, Cohn, Ferris, Glovsky and Popeo in Washington. Samuels represents the National Association of Health and Education Facilities Finance Authorities, which brings not-for-profit hospital bonds to the tax-exempt markets.
The National Commission on Fiscal Responsibility called for an end to all tax exemptions, except for some smaller and more targeted ones. Taxable interest for newly issued municipal bonds ranked among the commission's priorities for fundamental tax reform by 2012.
Since then, four bills that would eliminate or overhaul tax breaks—known as tax expenditures in policy circles—have been introduced in Congress, according to a summary by the National Association of Bond Lawyers. Sen. Ron Wyden (D-Ore.) in April introduced a bill to replace municipal bonds' tax-exempt interest with tax credits. In July, Rep. John Tierney (D-Mass.) put forward legislation to replace tax exemption on newly issued municipal bonds with taxable bonds with a direct federal interest subsidy for borrowers of 28%. The proposal would be revenue-neutral the first year.
“We believe the law ought to stay as it is,” Rock said. Hospitals that borrow in tax-exempt markets do so for lower interest rates than investors would settle for in taxable markets. That boosts access to capital for hospitals and keeps borrowing costs down, he said.
Samuels argued federal interest subsidies for borrowers—similar to Build American Bonds that Congress temporarily allowed during the credit crisis—would prove too risky to replace the tax-exempt market. Unlike tax breaks, Congress would be required to appropriate money for the bond subsidies and could adjust subsidies, which would create uncertainty and affect demand for bonds, he said. Build American Bonds paid municipal borrowers a direct subsidy of 35% (Feb. 28, p. 18).
Municipal borrowers could see markets react as proposals emerge in coming months, said Michael Bailey, a partner at the law firm Foley & Lardner and the immediate past chairman of the Internal Revenue Services advisory committee on tax-exempt entities. Bailey said the firm has advised clients to prepare for the chance of market disruption. A credible proposal from Congress could significantly upend the municipal markets.
Not everyone considers tax-exempt bonds to face an immediate threat. Bart Plank, a managing director in New York with Cain Bros., a healthcare investment bank and financial adviser, said he is skeptical the deficit committee would debate eliminating the tax-exempt bond market. He argued an overhaul of the municipal bond market would prove too complex to undertaken by lawmakers with such a sizable task and limited deadline.
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