Tax-exempt status of municipal bonds under fire in DC

In early April, U.S. Sens. Elizabeth Warren and Mo Cowan joined 12 colleagues in signing a letter to President Barack Obama opposing the reduction or elimination of the tax-exempt status of municipal bonds.
 
Any restriction on this tax-exempt status – which has been the subject of debate in Washington of late – would make municipal bonds far less attractive to investors and drive up borrowing costs for municipalities. This would lead to less borrowing and fewer infrastructure projects, casting a shadow on local and regional economic growth.
 
Municipal bonds are widely used by states, counties, municipalities, school districts, redevelopment agencies, special-purpose districts and other governmental entities to finance critical infrastructure projects. According to the National Association of Counties, approximately 90 percent of municipal bond financing over the past decade was used for schools, hospitals, water infrastructure, sewer facilities, public power utilities, roads and mass transit. Last year, municipal bonds financed $179 billion in state and local infrastructure projects nationwide.
 
According to the National League of Cities, local governments save an average of 25 percent to 30 percent by using tax-exempt municipal bonds versus taxable bonds.
 
“While we recognize the challenges our nation faces as we work to bring order to our fiscal house,” the senators wrote, “we believe strongly that balancing the federal deficit by shifting the burden to local governments would have, ironically, a substantial negative impact on our federal budget outlook through decreased federal tax receipts as a result of diminished economic activity.”
 
The House Ways and Means Committee debated the tax-exempt status of municipal bonds at a February hearing on tax reform, and the Senate passed a non-binding budget resolution that would support a reduction or elimination of the tax exemption.
 
The president’s fiscal 2014 federal budget proposal (see related story, page 8) would impose a 28 percent limit on all itemized deductions claimed by those filing tax returns in higher income brackets – a limit that would apply to the interest earned on tax-exempt municipal bonds.
 
Congressman Richard Neal of Massachusetts recently co-sponsored a House resolution highlighting the value of tax-exempt municipal bonds and commemorating their historic role in building the nation’s infrastructure.
 
Tax-exempt financing for public capital improvement projects was included in the nation’s first federal tax code, written in 1913, and has remained a critical tool for local government.
 
In the past decade in Massachusetts, municipal bonds have been used for $37.9 billion in infrastructure projects. The state’s municipalities continue to issue an estimated $3 billion in tax-exempt municipal bonds annually.
 
Total borrowing costs for cities and towns could increase by as much as 50 percent if the tax-exempt status of municipal bonds is eliminated or capped. An elimination of the status would have added $11.4 billion in costs over the last decade; the president’s proposed cap would have added $4 billion.