National Association of Counties
Washington, D.C.

 NACo study: Proposal to change tax status harms counties, taxpayers

As Congress and the Administration contemplate reforming the U.S. tax code, NACo has released important new research, which shows that changing the tax-exempt status of municipal bond interest is costly and risky to American investors, local taxpayers and counties.

Municipal Bonds Build America:  A County Perspective on Changing the Tax-exempt Status of Municipal Bond Interest estimates the cost for counties and for all municipal bond issuers if a repeal or a 28 percent cap on the exemption of municipal bond interest were enacted. The study significantly expands a previously released study in February, issued jointly with the U.S. Conference of Mayors and the National League of Cities.

SR-Muni.pngAccording to NACo President Chris Rodgers, counties are gravely concerned about an Obama Administration’s FY14 budget proposal that mirrors a 2011 proposal of a 28 percent cap on the benefit accruing to investors in tax-exempt municipal bonds.  Action in Congress also concerns counties as reports circulate that congressional tax reformers are casting an eye at the tax-exempt status of municipal bonds.

The new NACo study of the municipal bond market and of the 2012 estimated impact of changes to the tax-exempt status of municipal bond interest shows that:

Any change would severely impact counties’ ability to invest in infrastructure and deliver services to their residents.

Counties invest more than $52.3 billion annually in public works projects.  For 2012, county interest costs would have increased by $9 billion if municipal bond earnings had been taxable over the last 15 years and by about $3.2 billion with a 28 percent cap. 

American investors and taxpayers will be hurt by taxing municipal bonds.

It’s not only the very wealthy who favor municipal bonds as investments. American households hold almost three-quarters of the municipal bond market mainly for retirement plan diversification and as a way to invest in their communities.  A cap or repeal of the tax-exempt status of municipal bond interest would deeply affect Americans’ retirement portfolios and county taxpayers by making municipal bond investments more costly and less attractive.

Counties, states and other localities build and maintain America’s infrastructure.

Between 2003 and 2012 counties, states and other localities invested $3.2 trillion in infrastructure through tax-exempt municipal bonds, 2.5 times more than the federal investment.

“Congress and the Administration should look elsewhere to find additional sources of federal revenue as part of comprehensive tax reform,” Rodgers said.  “Tax-exempt municipal bonds are used by counties and other municipal bond issuers almost entirely to build infrastructure which is a unique feature on the bond market.”

NACo First Vice President Linda Langston, supervisor, Linn County, Iowa, said taxing municipal bond interest is not a new idea, but still a bad idea.

 “The tax exemption for municipal bond interest has been in law since the federal income tax was imposed 100 years ago,” Langston said.  “The exemption survived the Great Depression and World War II when the federal government was seeking additional revenue.  Even then, the exemption was left intact.  We just do not believe that governments should tax each other.”    

Municipal bonds are a proven, decentralized investment tool that maintains the decision-making for infrastructure with state and local government leaders in partnership with their residents.  The bonds have helped build America’s public infrastructure for more than 200 years.  

“Municipal bonds are a social compact between a county and its residents in building a county’s future,” said Emilia Istrate, NACo research director and the report’s author.  “County leaders select and approve the infrastructure projects to be financed with municipal bonds. County citizens often vote on the debt-financed projects, invest in them by purchasing municipal bonds and back the county bonds with their taxes.”

Counties of all sizes were surveyed, ranging from large counties such as Philadelphia, San Francisco and Suffolk County/Boston (all consolidated city-county governments), to smaller counties such as Athens County, Ohio, Roscommon County, Mich. and Saunders County, Neb.