IRS: Special Districts Not So Special

The Internal Revenue Service (IRS) has proposed new regulations potentially restricting special taxing districts and other special districts from issuing tax-exempt municipal bonds, reports Governing

Special districts are usually created to raise revenue for and address specific functions, such as airports, libraries, wastewater, etc. Last night the Baltimore City Council approved City Council Bill 16-0671 creating the Port Covington Special Taxing District to guarantee the Port Covington tax increment financing (TIF) deal.

The IRS traditionally found that a special district can issue municipal tax-free bonds if it is authorized to exercise at least one of three sovereign powers: the power to tax, the power to exercise eminent domain, or police power. This test would still apply under the new regulations proposed by the IRS, but in addition, the special district must serve a governmental purpose and be governmentally controlled. Per Governing:

As creatures of the state, special-purpose districts have governing boards as determined by state law. But those boards may be appointed by public officials or by private entities. Or they may be elected by property owners within the special district — even though there may be only one or two residents, or in some cases, zero residents, to participate in a board election. While most special-purpose districts have employees, some don’t, distinguishing them from every other kind of government in the country.

So if these entities don’t resemble traditional state and local governments, why should they be allowed to borrow in the same tax-exempt way? That’s just what the IRS wants to know. In February, the agency proposed regulations that would more clearly define the difference between a municipality and a special district. It may seem like a fine point, but in fact there’s big money at stake. Special districts could see a nearly 30 percent increase in the costs of borrowing, which could work out to about $700 billion. It could be prohibitive enough to force many special districts out of existence.

Governing‘s article is available here. 

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