BOSTON — The fight to keep tax-exemption for interest paid by municipal bonds poses the greatest challenge to state and local bond issuers in three decades, an economist said Friday.
"We need to give state and local governments the tools to say the numbers are wrong. They don't want to hear from us, the bankers," Citi managing director and senior municipal strategist George Friedlander said at the second and final day of The Bond Buyer's municipal finance conference, co-hosted with the Brandeis University International Business School.
The reduction or elimination of tax-exempt bonds is under debate in Washington. President Obama's administration has recommended capping the tax exemption at 28% for the top 2% of income earners. Members of Congress, meanwhile, are eyeballing all aspects of the federal tax code in what could be the biggest overhaul since 1986, when President Reagan's package became law with new restrictions for issuers and investors.
"This is a time of real jeopardy to tax exemption," he said.
Local issuers finance critical infrastructure projects with bonds and fear that eliminating the exemption would drive up borrowing costs. Last year, municipal bonds financed $179 billion in state and local infrastructure projects nationwide, according to the Massachusetts Municipal Association. The National League of Cities reported that local issuers save an average of 25% to 30% by using tax-exempt municipal bonds as opposed to taxable bonds.
Friedlander and other panelists at the Park Plaza hotel called said the Joint Tax Committee of Congress was working with a flawed model.
"Those kinds of models have problems all over the place," said Philip Fischer, head of municipal research for Bank of America Merrill Lynch.
"No mayor or state treasurer or whatever wants to go up the hill and do dueling analyses with the joint tax analysis," said Friedlander. "This is a difficult, difficult time to make a case for tax exemption. The muni market is a train wreck right now."
According to Friedlander, no direct subsidy is more efficient than simply letting a state or local government to decide to borrow at a reasonable rate for projects of their choosing. "Tax-credit bonds don't work," he said, saying that 98% of issuers chose Build America Bonds when BABs were available in 2009 and 2010.
Chris Mauro, the head of municipal research for RBC Capital Markets, countered the argument that tax-exemption disproportionately benefits the wealthy. "A lot of things the federal government does benefits the wealthy, so their argument has a Casablanca-type ring. They're shocked … shocked!"
The conference featured academics and practitioners analyzing recent developments in the municipal credit markets.
