Muni Bonds Under Siege
Leaders on both sides of the aisle in Washington, D.C., are moving forward on tax proposals that could fundamentally undermine one of the pillars of America’s economic competitiveness.
According to the Government Finance Officers Association, more than 75 percent of the public infrastructure in America is built and maintained by state and local governments. The lifeblood of this infrastructure base, from the roads we drive on to the water we drink, is the municipal bond market. States and localities financed $179 billion in infrastructure through the bond market in 2012 alone, and are on track to deliver more than $2 trillion in bond-financed infrastructure over the next decade.
Low interest rates have created an historic opportunity for states to fund desperately needed investments at minimal cost. The incentive that underpins the bond market is now under threat. Interest on muni bonds has been tax exempt for ,more than 100 years, but Congress is taking a fine-toothed comb to all so-called “tax expenditures,” those special provisions that reduce federal revenue, including the tax treatment of municipal bond interest.
Leaders in both the House and Senate are exploring options through both budget resolutions and tax reform proposals that would either eliminate the muni bond exemption entirely or cap deductions for all earners at 28 percent. These are appealing ideas for leaders on both sides of the aisle as they would generate hundreds of billions in tax savings that could be used to pay down the deficit, reduce other tax rates or fund new programs, without taking on mortgage interest deductions or other much more political visible exemptions.
Experts agree that if the exemption was reduced or eliminated, state and local governments would have to offer higher yields to attract bond buyers. Full elimination would raise state and local borrowing costs by $495 billion over the next decade. Even a partial reduction, such as through a 28 percent cap, would increase borrowing costs by $173 billion over the same time period.
The 28 percent is contained in U.S. Sen. Patty Murray’s draft budget resolution that could be voted on as early as this week. Meanwhile, both chambers have committees considering tax reform proposals that include an option of eliminating the deduction all together.
Given the urgency of the issue, CSG has joined a coalition of 59 separate state and local organizations opposing any federal change to the municipal bond exemption. The coalition sent a letter to House and Senate leadership March 19. Treasurers from across the country, in town for the National Association of State Treasurers’ legislative conference, conducted a face-to-face meeting with House Majority Leader Eric Cantor March 20.
State and local advocacy was successful in blocking similar measures in the Fiscal Cliff compromise at the end of last year. However, without a strong and consistent voice from the states, the foundation for infrastructure funding in America easily could get lost in the shuffle.