PAC Formed to Defend Muni Tax-Exemption

Proponents of the tax-exempt status of municipal bonds have come together to create a non-partisan political action committee, hoping to preserve the exemption and convey the importance of keeping it to the average taxpayer.

ACT NOW — Americans Calling for Truth NOW — is a grassroots activist group co-founded by John Kraft and Jason Capizzi, bond counsel at John L. Kraft Esq., LLC. They held a seminar Thursday to discuss threats to the tax exemption with other leaders in the bond market, including Jim Lebenthal, Standard & Poor’s, the National Association of Bond Lawyers, and the New Jersey State League of Municipalities.

“ACT NOW will communicate the truth about the consequences should the tax-exemption be eliminated or curtailed,” Capizzi said. “And the truth is not pretty. It’s just bad public policy.”

ACT NOW will work to get taxpayers involved by writing letters to congress, fundraising, and educating the public on how threats to tax-exemption affect everyone’s taxes. “Obama wants to restrict the use of tax-exemption and it will make borrowing extremely expensive for towns and schools like Rutgers to be able to build new facilities,” Kraft said at the meeting in New Brunswick, N.J., home of Rutgers University. “The voice for supporting tax-exemption has been largely successful, but we have to go back again and make sure Congress knows that you won’t stand for eliminating tax-exemption.”

A 28% cap on tax exempt interest 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. Both House Budget Committee chairman Paul Ryan, R-Wis., and House Ways and Means Committee chairman Dave Camp, R-Mich., have favored reducing the top marginal tax rate to 25%, which would cut the subsidy for municipal bonds another three percentage points, according to the Center on Budget and Policy Priorities.

Jim Lebenthal of Lebenthal & Co. said the biggest challenge is getting taxpayers excited about an issue that can appear boring. “How do you get a nation to care when munis are perceived as dry as dust? Even the return on investment in infrastructure can be made popular.”

New Jersey State League of Municipalities president Janice Mironov said one of the most disturbing things about the threats to tax-exemption is how Congress has framed it. “They see this as a tax loophole for the rich, and that’s bogus,” she said. “It’s a conservative, stable source of investment. And the tax-free benefit is a benefit provided so interest rates can remain lower when municipalities issue bonds.”

Tax-exempt issuance is also a huge source for local infrastructure projects, Mironov said. In the10 years through 2012, he said, $1.65 trillion was issued with tax-exemption, including about $514 billion for primary and secondary schools, $258 billion for water and sewer, $178 billion for road construction, and $105 billion for mass transit.

Steve Murphy, senior managing director of U.S. public finance ratings at Standard & Poor’s, said the country has $4 trillion in needs and is only borrowing $400 million a year. If bonds become taxable, yields could rise 200 basis points, creating a 30% to 50% increase in the cost of borrowing. “What do you do with that cost? Raise taxes? Borrow less? What happens to the smaller entities that need access? What happens to the small school district in the market that is now competing with Intel and IMB?” Murphy asked.

William Daly, director of governmental affairs at the National Association of Bond Lawyers, highlighted the need for education on municipal bonds in Washington. “Washington doesn’t understand what tax-exempt bonds do and how they relate to infrastructure and the economy,” he said. “They are also confused and think the Federal government provides infrastructure financings and they don’t have a clue that its overwhelming provided by state and local projects.”

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