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Local Groups: Don't Mess With Our Tax-Exempt Bonds

FEB 27, 2013 4:42pm ET
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State and local groups have one message for Washington: “Don’t mess with our tax exempt bonds!”

The National Association of Counties, the National League of Cities and the U.S. Conference of Mayors called on lawmakers Wednesday to reject proposals that would restrict or eliminate tax exemption for municipal bonds, warning this would increase their borrowing costs and harm financing for local infrastructure projects.

The groups also released a report, “Protecting Bonds to Save Infrastructure and Jobs,” which detailed what municipal bonds are used for and how they would be affected if restricted or eliminated.

The report found state and local governments financed more than $1.65 trillion of infrastructure from 2003 to 2012 through the tax-exempt bond market. During that period, schools were the number one infrastructure project financed with municipal bonds, at $514.1 billion, it said.

Nearly $288 billion of financing was used for general acute care hospitals, $258 billion for water and sewer facilities and $178 billion was for roads. In 2012, more than 6,600 tax-exempt municipal bonds financed over $179 billion of infrastructure projects.

“Tax-exempt municipal bonds are the backbones of our economies and our ability to build the things that are important to everyone of our citizens,” USCM vice president and Mesa, Ariz. Mayor Scott Smith said at the National Press Club. “Broad use of tax-exempt financing touches everyone of us.”

If muni bonds were subject to the 28% cap on tax expenditures that has been proposed by the White House, interest expenses for infrastructure projects financed over the past 10 years would rise by an additional $173 billion, the report said.

Smith said the 28% cap would shift the tax burden onto everyday citizens. “When local governments pay more for financing, two things happen: number one, less gets built and number two our citizens pay more in taxes,” he said. “This kind of action, while it appears that it solves Washington’s problem, has a ripple effect that is beyond significant. It’s just a bad solution.”

Additionally, if muni bonds were subject to the Bowles-Simpson deficit reduction plan, which would tax all newly-issued bonds, governments would end up with an additional $495 billion of interest expense during the 2003-2012 period, the report found.

NLC representative and Houston City Controller Ronald Green tried to put a human face on the impact of changing the tax-exempt status of municipal bonds. He emphasized that muni bonds are authorized by voters to get projects on the ground as quickly as possible and that higher debt service for cities would be mean layoffs.

“It won’t mean layoffs for people in the 39% tax bracket because that is the biggest misnomer out there,” Green said. “These are average, everyday people who work. They are your neighbors, they are my neighbors and they have grown to expect to be able to get jobs from the issuance of municipal bonds.”

“These trickle down to jobs on the street,” Green said. “They trickle down to the quality of life in neighborhoods. It is the average Joe who ultimately ends up paying the price.”

Timothy Firestine, chief administrative officer for Montgomery County, Md. and president-elect of the Government Finance Officers Association, warned that if tax-exemption is repealed for muni bonds, the county would wind up with about $40 million of additional debt service costs each year. If the county had to reduce its operating budget due to higher debt service costs, roughly 536 teachers or 300 police officers would be laid off, he said.

“Municipal bonds have survived two world wars, they survived a great depression,” Firestine said. “If our greatest generation can leave this alone and think about who holds those bonds today, people over 65, that’s the generation who left the exemption in place. I think it’s time for the federal government to leave it alone and respect those who took care of it in the past.”

Representatives of the groups stressed how they are fighting to show administration officials and lawmakers that munis are a tangible item, which don’t benefit the wealthy, but rather all taxpayers, and that they are an extremely efficient and safe investment.

Separately, about a dozen members from the National Association of Health and Educational Facilities Finance Authorities (NAHEFFA) descended on Washington this week to lobby congressional representatives from their state about the importance of maintaining tax exemption. Dennis Reilly, executive director of the Wisconsin Health Educational Facility Authority discussed with Wisconsin lawmakers the facilities that benefit from municipal bonds, such as small private colleges.

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