Urge your Members of Congress to oppose any legislation that would eliminate or limit the tax-exempt status of municipal bonds.
Tax-exempt bonds were first established in our nation’s tax code in 1913 and are a well-established government financing tool. These bonds are predominantly issued by state and local governments for governmental infrastructure and capital needs purposes and to help pay for public projects such as the construction or improvement of schools, streets, highways, hospitals, bridges, water and sewer systems, ports, airports and other public works.
Over the past half century, state and local governments have increasingly borne the cost of infrastructure and public improvements. For example, according to the Congressional Budget Office, about 75 percent of public funding for transportation and water infrastructure is supplied by state and local governments. Tax-exempt bonds are a critical tool for counties in the budgeting and financing of these long-term investments in the infrastructure and facilities necessary to meet public demand. Without the tax-exemption, counties would pay more to raise capital, a cost that would ultimately be borne by taxpayers through means such as reduced spending on the roads and bridges that counties are responsible for, decreased economic development, higher taxes or higher user fees.
As congressional leaders have placed increased focus on comprehensive tax reform as part of larger efforts to reduce our nation’s deficit, elimination or reduction of tax-exempt municipal bond interest remains on the table as one of several means of achieving lower overall tax rates. As Congressional Republicans continue working towards comprehensive tax reform in the 115th Congress, counties face the risk of losing a low-cost, market-driven means of financing to support local infrastructure and public improvement needs.
Eliminating the tax-exempt status of municipal bonds was first entertained by President Obama’s National Commission on Fiscal Responsibility and Reform (Simpson-Bowles Plan). A derivative of that proposal – a 28 percent cap on the benefit of the exemption – was included in the President Obama’s five most recent budget requests. In March of 2013, the Senate FY 2014 Budget Resolution (S. Con. Res. 8) suggested the possibility of a cap on tax expenditures, which could include the exemption for interest earned on state and local municipal bonds.
Similar proposals have continued to surface in the ongoing debate on tax reform in the Senate Finance Committee and House Ways and Means Committee. In 2014, former Ways and Means Chairman Dave Camp (R-Mich.) included a provision in his comprehensive reform discussion draft that would have placed a surtax on otherwise tax-exempt bond interest earned by high income taxpayers. All of these proposals would have the effect of imposing an income tax on otherwise tax-exempt interest earned by investors.
Although tax reform efforts stalled in the 113th Congress, the work resumed in the 114th. House Ways and Means Chair Kevin Brady (R-Texas) held several committee hearings in early 2016, providing representatives with opportunities to provide comments and proposals for tax reform. Much of the feedback received was used to shape the tax reform blueprint released in June 2016 by House Speaker Paul Ryan (R-Wis.) as part of the GOP’s “A Better Way” campaign. The blueprint is largely focused on lowering tax rates and simplifying the tax code, but lacks specific details on how these objectives would be achieved. It remains unclear how the tax-exemption for municipal bond interest would be treated under the reform plan.
At the start of 2017, conditions appeared favorable for major tax reform legislation to advance, since the 115th Congress and White House are now controlled by the same party. Ways and Means Committee members in the U.S. House have been busy since the latter part of 2016 drafting comprehensive reform language based on Speaker Ryan’s “A Better Way” blueprint. Draft text could be released by lawmakers in the coming months.
KEY TALKING POINTS:
- A fundamental feature of the first federal tax code written in 1913, tax-exempt financing is used by state and local governments to raise capital to finance public capital improvements and other projects, including infrastructure facilities that are vitally important to sustained economic growth.
- Between 2003 and 2012, counties, localities, states and state/local authorities financed $3.2 trillion in infrastructure investment through tax-exempt municipal bonds.
- If municipal bonds were fully taxable during the 2003-2012 period, it is estimated that the financing for the 21 largest infrastructure purposes would have cost state and local governments an additional $495 billion of interest expense. If the 28 percent cap were in effect, the additional cost to state and local governments would have been approximately $173.4 billion.
- For 2012, the debt service burden for counties would have risen by $9 billion if municipal bonds were fully taxable over the last 15 years and roughly $3.2 billion in the case of a 28 percent cap. Americans, as investors in municipal bonds and as taxpayers securing the payment of municipal bonds, would have borne this burden.
- The municipal bond tax-exemption represents a fair allocation of the cost of projects between federal and state/local levels of government. Through the use of tax-exempt municipal bonds, state and local governments invested 2.5 times more in infrastructure than the federal government.
- Tax-exempt bonds are vital for infrastructure, justice and health needs because counties own and operate 45 percent of public roads and highways, own almost a third of the nation’s transit systems and airports, own 961 hospitals, manage 1,943 health departments and own the vast majority of the nation’s jails.
For further information, contact: Jack Peterson at 202.661.8805 or firstname.lastname@example.org.