President Donald Trump signed the Tax Cuts and Jobs Act into law Dec. 22, 2017 — the largest federal tax overhaul in 30 years.
As the law begins to go into effect, here are some observations on how parts of the bill may impact the construction market.
First, the most publicized part of the bill was a reduction in the corporate tax rate from 35 percent to a flat 21 percent, the lowest U.S. corporate tax rate in the United States in 80 years. Many companies, including Apple, AT&T and General Motors have announced that they intend upon expanding or building new facilities and investing in retooling and modernizing factories.
Second, private activity bonds retained their tax advantages. Construction at hospitals, nonprofit colleges and universities, airports and affordable housing constitutes private activity that has a significant public purpose. Many of these private sector facilities rely heavily upon private activity bonds for tax-exempt financing. The U.S. House version of the bill had proposed to totally eliminate these bonds, which would have significantly raised borrowing costs and negatively impacted future construction projects. The tax-exempt status of such bonds was retained in the final bill signed by the president.
Challenges and changes
Third, changes to the overall rates and some specific to municipal bonds may not be favorable. Municipal bonds are a critical piece to financing infrastructure projects. In 2015, 32 percent of infrastructure investments were paid for through issuance of municipal bonds. Although interest from these bonds will still be tax exempt, with the reduction in the corporate and individual tax rates bond yields will have to rise in order for investors to find them as attractive investments. Rising yields, combined with the elimination of the deduction for advance refunding, will likely raise the overall costs of tax-exempt financing for infrastructure projects.
Finally, the state and local taxes deduction was capped at $10,000. High-tax cities and states, like California and New York, may lower their tax rates to offset the tax increase on residents through elimination of this deduction. What may follow is that state and local expenditures on infrastructure, which account for roughly 75 percent of the total, could decline as tax revenues drop.
While the tax bill has yielded positive results for construction industry employers due to the reduced corporate tax rate and to the construction marketplace for retaining private activity bonds, it may create challenges to finance public infrastructure investment in the future.
Attorney Michael McNally is a shareholder with the Minneapolis law firm Felhaber Larson, and practices in the areas of labor law and employee benefits, with extensive experience in the construction industry. He is labor council for the Sheet Metal and Air-Conditioning Contractors’ National Association.