Years After TCJA's Enactment, Push to Restore Tax-Exempt Advance Refunding Continues

Why It Matters

Restoring tax‑exempt advance refundings would give state and local governments a cheaper, more flexible way to refinance debt as rates climb, directly affecting municipal borrowing costs and infrastructure financing.

Key Takeaways

• TCJA banned tax‑exempt advance refundings in 2018
• Rising rates increase demand for restoring the tool
• H.R.1255 aims to reinstate advance‑refunding bonds
• Advocacy groups target bipartisan support before 2027 Congress

Pulse Analysis

Advance refundings allowed issuers to replace higher‑cost debt with lower‑interest, tax‑exempt bonds, a practice that underpinned municipal financing for decades. When the Tax Cuts and Jobs Act of 2017 removed the tax‑exempt status, municipalities lost a straightforward refinancing option, forcing them to rely on taxable structures or wait for callable dates. The change reduced debt‑service savings and limited flexibility, prompting industry groups to warn that the loss could strain state and local budgets, especially as infrastructure needs grow.

Since 2018, the macro environment has shifted dramatically. After an initial period of low rates, the Federal Reserve’s tightening cycle has pushed benchmark yields higher, widening the spread between taxable and tax‑exempt yields. This differential makes advance refundings financially attractive again, as they can capture the tax‑exempt advantage and cut interest expenses. Treasury officials like Rachael Eubanks and Bond Dealers of America’s Brett Bolton note that issuers are experimenting with complex tender structures, but these are costly and less predictable than the classic advance‑refunding model. Restoring the tool would therefore re‑introduce a low‑cost, transparent mechanism that aligns with municipal finance best practices.

Legislatively, the push centers on H.R.1255, introduced by Rep. David Kustoff and co‑sponsored by Rep. Rudy Yakym. The bill seeks to amend the Internal Revenue Code to reinstate advance‑refunding bonds and has garnered bipartisan backing from the Public Finance Network and other advocacy coalitions. While the proposal is unlikely to pass as a standalone measure, proponents are eyeing the post‑midterm window and the 2027 Congress as a realistic opportunity. If successful, the restoration could reshape municipal borrowing strategies, lower taxpayer burdens, and accelerate infrastructure projects across the United States.