WASHINGTON — If the tax exemption for municipal bonds had been repealed in 2012, it would have killed as many as 892,000 jobs and eliminated as much as $46.9 billion of labor income and $71 billion annually in gross domestic product, according to a U.S. Conference of Mayors report.
The USCM, convening in Las Vegas at their 81st annual conference, published the 16-page report, "U.S. Metro Economies: Job Impact of Proposals to Limit the Municipal Bond Market," Monday as they concluded their meeting. The report was prepared by IHS Global Insight for the USCM and the National League of Cities.
The report describes the role of major types of state and local infrastructure spending using tax exempt financing and estimated the economic impact of proposed tax exemption limitations, such as a full repeal, or a 28% cap on tax exempt interest, which the report found would have cost 311,736 jobs, $16.4 billion in labor income and $24.7 billion in GDP.
The 28% cap is in President Obama's fiscal year 2014 budget and has appeared in other tax reform and deficit reduction proposals over the past few years.
"State and local infrastructure investment is a crucial fuel for U.S. economic growth," the report said.
The report is broken down into infrastructure areas - schools, hospitals, water and sewer, roads, streets and highways, mass transit, and public power projects - that most benefit from the tax exemption.
"Mayors built America with Community Development Block Grants and municipal bonds," said newly elected USCM president Scott Smith, Mayor of Mesa, Arizona. "Now Washington wants to demolish these programs when the vast majority of our metro areas need every means to create jobs. We keep hammering away at jobs while Washington keeps pulling the nails out."
The report said that every dollar spent on infrastructure projects results in $2.78 of total gross economic output. There would be a $17.3 billion reduction in infrastructure spending under a 28% cap scenario and a $49.5 billion reduction in infrastructure spending if tax exemption were repealed.
The report further analyzed the distribution of specific employment sectors based on changes to the tax exemption.
Under a 28% scenario in 2012, there would be a 20 basis point reduction in year-over-year job growth, and the unemployment rate would have been 8.3% instead of 8.1%. Real GDP growth would have been 0.2% lower. Under the full repeal scenario, year-over-year job growth would have been 70 basis points lower and the unemployment rate would have been 8.6%. Real GDP growth would have been 0.5% lower, the report said.
Construction jobs would suffer the most in both a 28% cap and full repeal scenario. Under a 28% cap proposal, 122,370 construction jobs would be lost annually whereas some 350,134 jobs would be lost under a full repeal.
The report said that direct and indirect jobs supported by infrastructure spending provide further stimulus as increased wages flow through the economy.
"Cuts to infrastructure investment hit metro areas the hardest and yet these are exactly the places that warrant the most support," the report said. "We expect that over the next 30 years 94% of U.S. economic growth will occur in metro areas. Investment in metro areas lowers the costs of doing business, stimulating further business activity and economic growth. A loss of the tax exemption for municipal bonds threatens to curtail this critical investment in America's future."