Photos by David Hathcox
NACo President Chris Rodgers speaks during a briefing in Washington, D.C. Feb. 27 about federal proposals that could repeal the tax exemption on municipal bond interest. With him (l-r) are Timothy Firestine, president-elect, Government Finance Officers Assn.; Ronald Green, controller, Houston, Texas; and Scott Smith, mayor, Mesa, Ariz. and vice president of the U.S. Conference of Mayors.
NACo and other organizations representing local governments have a message for Washington: “Don’t Mess with Our Bonds!”
Chris Rodgers, NACo president, and leaders from the National League of Cities (NLC) and the U.S. Conference of Mayors (USCM) called on Congress and the Administration to reject proposed changes in the tax-exempt status of municipal bonds at a recent news media briefing in Washington, D.C. Those changes would cost counties billions of dollars and hurt their ability to finance local infrastructure projects, they said.
“Maintaining the tax exemption prevents shifting new burdens to state and local governments,” Rodgers told reporters at the National Press Club Feb. 27, “because borrowing costs would increase, which hurts local taxpayers and can jeopardize whether local projects are completed.”
One proposed change to the federal tax code would impose a 28 percent benefit cap for certain taxpayers on many itemized deductions and exclusions, including tax-exempt municipal bond interest. The effect would be a partial tax on interest that would otherwise be exempt from income tax.
Had that cap been in effect over the last decade, it would have cost states and localities an extra $173 billion in interest payments, according to Protecting Bonds to Save Infrastructure and Jobs, a new report from NACo, NLC and USCM.
The greater fear, a full repeal of the exemption, would have cost $495.3 billion.
Tim Firestine, chief administrator, Montgomery County, Md., said local governments are worried that a cap would be just the beginning. He is also president-elect of the Government Finance Officers Association (GFOA).
“Once you go to cap it, I think the concern is that now we’ve done something that we’ve never done before, and they’ll go back to the well a second time,” he said. “That’s why we’re really saying the true impact we’re concerned about here is repeal.”
The research compiled with assistance from the GFOA, highlights the broad use of muni bonds by several counties — and how much a repeal of the tax exemption would have cost them in 2012.
Firestine said repealing the exemption would cost his county $40 million annually. “That’s $40 million worth of stuff either we can’t do in the operating budget because we have to pay more in debt service,” he said, “or we have to reduce our capital program because we can’t afford to do all the stuff that we could.”
As an example, he noted that amount equates to cutting 536 teachers from schools or almost 300 police officers.
Commissioner Daniel Troy, NACo Finance and Intergovernmental Affairs Steering Committee chair, presents NACo’s case to Capitol Hill staff for keeping municipal bond earnings tax-free during a Hill briefing March 5. Also supporting NACo’s case on the panel were Montgomery County, Md. CAO Tim Firestine and Past NACo President Lenny Eliason.
For Rodgers’ Douglas County, it would have cost $1.16 million, and the cost to Wake County, N.C. would have been $36.8 million. The report also estimates losses for Linn County, Iowa; Prince George’s County, Md.; Grand Traverse County, Mich.; Taney County, Mo.; Mecklenburg County, N.C.; Athens County, Ohio; and Fairfax County, Va.
Muni bonds offer local governments a low-cost way to finance projects such as schools, hospitals, water, sewer facilities, public power utilities, roads and mass transit. State and local governments financed more than $1.65 trillion of infrastructure investment between 2003 and 2012 through the tax-exempt bond market, the report said.
The report states: “Curtailing or eliminating the tax exemption would raise costs for financially-strapped state and local governments and would result in less investment in infrastructure at a time when jobs are scarce and the physical state of our public works is deteriorating.
How the Bond Interest Tax Exemption Saves Counties Money
Under the federal tax code, investors are not required to pay federal income tax on interest earned from most bonds issued by state and local governments. The tax exemption for municipal bond interest has been in law since the creation of the federal income tax 100 years ago.
As a result of this tax exemption, state and local governments receive a lower interest rate on their borrowing than they would if their interest was taxable to investors. The tax exemption can save states and localities up to two percentage points on their borrowing rates under typical market conditions.