The Obama administration’s 2014 fiscal year budget proposal included a 28 percent cap on the benefits of tax-exempt bonds. The plan is meant to add more money to the government’s coffers and the administration posed that it would affect predominantly the nation’s top earners. But a handful of recent studies have found that if such a change were implemented it could have a dramatic impact on the entities that use these bonds – local governments, educational institutions and healthcare providers.
Tax-exempt bonds are used by nonprofit organizations to provide capital for things like purchasing equipment and building facilities. Investors are able to purchase the bonds at a lower interest rate because their return is completely nontaxable.
In 2011, the most recent number for which figures are available, more than 21,000 tax-exempt bonds were issued totaling more than $297 billion, according to the Internal Revenue Service. Of that, $86 billion were private-use bonds whose proceeds went toward education, housing and healthcare.
Chuck Samuels, an attorney at Mintz Levin Cohn Ferris Glovsky and Popeo PC, said hospitals are the largest single issuer of private, tax-exempt bonds. Samuels is a spokesperson for the National Association of Health and Educational Facilities Finance Authorities (NAHEFFA), which recently published a study calculating the potential impacts of a 28 percent interest cap on these bonds.
The report looked at bond projects financed over the past decade to gauge what the cost would have been had interest on these projects had a 28 percent cap. The authors assumed that nonprofits would have had to increase interest rates on the bonds to make them more appealing to purchasers whose benefits would now be taxed.
The study authors found that, over 10 years, nonprofits would have paid an additional $58.2 billion in interest expense, or almost $6 billion annually.
“Investors would demand higher interest rates from hospitals in order to purchase the bonds; they are less attractive an opportunity,” Samuels said. “Instead of 3 percent, the interest rate may have to be 3.5 percent. It may not sound like much, but it’s quite impactful.”
The affect on jobs was tallied as well. An annual loss of capital spending for health and education of nearly $6 billion would equate to more than 8,000 jobs lost in those two sectors. The jobs related to something like a new hospital wing being built include direct construction jobs, additional staff, suppliers of materials and tertiary services. It even impacts the surrounding communities, like restaurants nearby that serve employees of the hospital.
Mike Rock, senior associate director of federal relations for the American Hospital Association, said a cap on tax interest would increase healthcare costs across the board.
“To hospitals, these are still an important tool for getting necessary stuff done,” he said. “It is going to increase the cost of borrowing and, some projects, it will prevent them from getting done.”
Local government is also a large user of tax-exempt bonds and the National Association of Counties looked at how a change would impact communities. According to the organization, states and local governments have used $514 billion in tax-exempt municipal bonds over the past decade. Those funds went toward projects including water and sewer facilities, roads, power project and mass transit. They estimated that $288 billion went toward acute-care hospitals.
If those bonds had been fully taxable, the cost to governments would have been more than $495 billion in additional interest. In just 2012, counties would have paid $3.2 billion more if a 28 percent cap were enacted.
Samuels said there have been threats over the years to restrict tax-exempt bonds in a variety of ways. Most, “one-sided and asymmetrical,” he said, focused on the cost to the government, but not the benefits to jobs.
If he were asked a year ago if the proposal might pass, he would have said it was likely. But the partisan gridlock in Congress may prevent anything from moving forward today.
“While we understand their role in health and their contribution as large employers, there is a certain level of concern and antagonism in Congress toward hospitals and the role they play in increasing costs of healthcare and providing adequate charitable care,” Samuels said. “We want to make sure that people in Congress understand that these would be job-killing proposals.”