City, county groups oppose modifications to bond tax exemptions

In response to legislative proposals to modify or eliminate the federal tax exemption for municipal bond interest, local government organizations have come together to speak out against any such action. The U.S. Conference of Mayors, the National League of Cities (NLC) and the National Association of Counties jointly have released a report outlining municipal bond use during the past decade and how state and local governments would be affected by proposed changes. The groups also held a media roundtable in Washington, D.C., on Feb. 27 to explain their opposition to caps on tax exempt municipal bonds.

"Talk of eliminating the tax exemption on municipal bonds is more about politics — on both sides — than economics," NLC representative and Houston city controller Ronald Green said in a statement. "The yield from taxable bonds — if that was the only option for municipalities — would pale in comparison to the increased taxes residents would have to pay to fund infrastructure projects." One proposal would result in a cap of 28 percent for some taxpayers on tax-exempt interest. The report cites estimates that this would increase borrowing costs for state and local governments by up to .7 percentage points. Other proposals have called for a full federal income tax on the bond interest.

In the past decade, state and local governments used tax-exempt bonds to finance more than $1.65 trillion in infrastructure projects. The report states that a 28-percent cap would have cost governments an additional $173 billion in interest and that a full repeal of the exemption would have resulted in an additional $495 billion of interest expense. It also highlights actual 2012 interest payment costs in 30 local governments, including Philadelphia, Louisville, Ky., and Salt Lake City, Utah, as well as infrastructure borrowing by state from 2003 to 2012. The top category for state and local infrastructure spending using tax exempt financing was primary and secondary schools ($514 billion), followed by general acute care hospitals ($288 billion) and then water and sewer facilities ($258 billion).