Urge your Members of Congress to oppose any legislation that would eliminate or limit the tax-exempt status of municipal bonds and to restore advance refunding bonds, which allow counties to refinance municipal bonds once over the lifetime of the bond.
Tax-exempt bonds were written in the first tax code in 1913 and are a well-established financing tool. They are predominantly issued by state and local governments for governmental infrastructure and capital needs purposes. The debt issued for capital projects help governments 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.
On December 23, 2017, President Trump signed the Tax Cuts and Jobs Act, the first major rewrite of the tax code since 1986. Initial drafts would have curtailed the tax-exempt status of municipal bonds and specified which projects would qualify for tax-exempt status. However, the final bill signed into law retained in full the tax-exempt status for all municipal bonds.
However, the tax reform legislation did impact another type of tax-exempt bond called advance refunding bonds. Counties may issue one advance refunding bond per tax-exempt municipal bond at a lower interest rate than the original bond. Prior to the Tax Cuts and Jobs Act, advance refunding bonds were also tax-exempt. In fact, they made up about a third of the municipal bond marketplace, with over $391 billion in advance refunding bonds being issued between 2012 and 2016. Over that time frame, municipalities saved almost $12 billion of taxpayer money through this financing tool.
With the completion of tax reform, there are no immediate threats to the tax-exempt status of municipal bonds. However, the ability to advance refund bonds saved counties and taxpayers across the country billions of dollars, and champions in Congress hope to restore this financing tool.
Over the past half century, state and local governments have increasingly borne the cost of infrastructure and public improvements. According to the Congressional Budget Office, about 75 percent of public funding for transportation and water infrastructure alone is supplied by state and local governments. The federal savings from the proposed changes will not offset the economic strain that will burden state and local governments (and their local taxpayers) because those investments will become more expensive.
Tax-exempt bonds are a critical tool for counties that facilitates the budgeting and financing of long-range 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 the 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.
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 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 976 hospitals, manage 1,592 health departments and own many of the nation’s jails.
For further information, contact: Jack Peterson at 202.661.8805 or firstname.lastname@example.org