On July 4, 2025, the president signed into law the so-called “One Big Beautiful Bill Act” (the “OBBBA”). While technically no longer a bill and its beauty is in the eye of the beholder, the OBBBA certainly is big. Even before the almost-1,000-page OBBBA took shape, the public finance community was on alert about lawmakers entertaining possibly peeling away or even eliminating the tax exemption of interest on municipal bonds in an effort to pay for the extension of the 2017 Tax Cuts and Jobs Act (the “TCJA”). Understandably so, because in 2017, to help offset the costs of the TCJA, lawmakers proposed eliminating tax exemption for qualified private activity bonds entirely and ultimately ended up scrapping tax-exempt advance refundings. Fortunately, tax-advantaged bonds survived the OBBBA intact and, in fact, have expanded in areas[1].
Space: The Latest Frontier
The OBBBA expands the airport category of exempt facility bonds under Section 142 of the Code to include spaceports[2]. A spaceport is defined as “any facility located at or in close proximity to a launch site or reentry site used for (A) manufacturing, assembling, or repairing spacecraft, space cargo, other facilities described in this paragraph, or any component of the foregoing, (B) flight control operations, (C) providing launch services and reentry services, or (D) transferring crew, spaceflight participants, or space cargo to or from spacecraft.” Space cargo includes “satellites, scientific experiments, other property transported into space, and any other type of payload, whether or not such property returns from space.” Spacecraft means “a launch vehicle or reentry vehicle[3].” Other terms take their meaning from existing definitions in Title 51 of the U.S. Code concerning “National and Commercial Space Programs” which was enacted in 2010. Section 142 will generally treat spaceports like airports with a few notable exceptions:
- Property located on land leased by a state or local governmental unit from the federal government will be treated as owned by the state or local governmental unit if the ground lease otherwise satisfies the lease requirements for exempt facility bonds.
- Spaceports are not required to be available for use by the general public.
- Spaceports are permitted to have industrial parks or manufacturing facilities that engage in private business.
- Bonds that finance spaceports are not treated as federally guaranteed merely because the federal government pays rent, user fees, or other charges in exchange for its use of the financed spaceport.
The last provision is interesting because it has been understood that, absent an absolute pledge of rental payments by the federal government, a lease of an exempt facility by the federal government (e.g., leases of areas of an airport to TSA or Customs and Border Protection) does not raise federal guarantee concerns. So, this provision for spaceports would seem to go without saying. That the OBBBA does say it only with respect to spaceports might cause handwringing about a negative implication that, for tax-exempt-bond-financed facilities other than spaceports, any lease payments by the federal government for its use of such facilities do raise federal guarantee concerns. Perhaps future regulations will serve as a guide[4]. These spaceport provisions apply to obligations issued after July 4, 2025. Time will tell whether these new rules permitting exempt facility bonds to boldly go where no bond has gone before will result in glimmering, futuristic spaceports or wretched hives of scum and villainy[5]. Watch this “space.”
More Affordable Space
The OBBBA also introduces changes pertaining to affordable housing. Significantly, the requirement that 50% of the aggregate basis of the buildings and land of a multifamily housing project be financed with tax-exempt bonds subject to volume cap in order to qualify for 4% housing credits (the so-called “50% test”) has been lowered to a 25% threshold. This new “25% test” is available for projects placed in service after December 31, 2025 so long as at least 5% of the project’s aggregate basis is financed by volume cap bonds that are part of an issue the issue date of which is after December 31, 2025. This provision is a welcome and long-sought development that is expected to facilitate more affordable housing projects and help reduce demand for volume cap. The OBBBA also permanently adopts the provision introduced by the TCJA that increases the state 9% housing credit ceiling each year. The OBBBA increases the amount each year by 12% in perpetuity, replacing the 12.5% increase each year that was enacted by TCJA and which was scheduled to expire after 2029.
Opportunity Spaces, Safe Spaces, and Beyond
Also worth mentioning is that the OBBBA makes permanent a couple of public finance-adjacent programs that were set to expire at the end of this year and next: (1) the New Markets Tax Credit under Section 45D which lawmakers authorized in 2000 to address underinvestment in economically distressed communities, and (2) Qualified Opportunity Zones under Section 1400Z‑1 which the TCJA created in order to encourage long-term investment in designated neighborhoods by providing tax benefits to investors. The OBBBA also modifies the excise tax on endowments of private colleges and universities. Previously, private higher educational institutions with at least 500 tuition-paying students and endowments of at least $500,000 per student were taxed at 1.4% on net investment income. Under the OBBBA, only the net investment income of private higher educational institutions with at least 3,000 tuition-paying students is now taxed at progressive rates based on endowment size:
- 1.4% for endowments of at least $500,000 per student
- 4% for endowments of at least $750,000 per student
- 8% for endowments of at least $2,000,000 per student
While not good news for institutions with larger endowments, the enacted provisions are less onerous than initial proposals which would have imposed tax rates of up to 21%. The new endowment tax rules apply to taxable years starting after December 31, 2025.
In conclusion, what looked like might be a scary bill ending tax exemption for all municipal bonds or a deeply disappointing bill paring it back, turned out to be, if not a beautiful bill, then at least a likeable bill for the public finance community.
[1] Like many of us throughout this process.
[2] Not to be confused with space pants.
[3] Which could take the form of a Winnebago or vacuum cleaner.
[4] Don’t panic if regulations for carbon capture and broadband exempt facility bonds arrive first.
[5] Excuse the mixed nerd metaphor.
