The American Public Power Association has adopted a resolution opposing all taxation of municipal bonds, including subsidized direct-pay bonds and traditional tax credit bonds.
The group’s Legislative & Resolutions Committee adopted the stance Tuesday following the release on Monday of a new report showing that any form of muni bond taxation would drive borrowing costs higher for both large and small issuers.
The report, entitled, “Tax Reform Proposal Analysis: Impact on Tax-Exempt Bond Financing,” was prepared for APPA by the BLX Group, a national advisory firm. It shows that forms of taxable munis would increase the all- inclusive cost of new municipal bond issuances by at least 51 basis points and as much as 166 basis points. Relative to current interest rates, that would be at an increase of between 16% and 49%.
The APPA said that proponents of changes to the muni tax code have attempted to obscure the effect it would have, by referring to the proposed changes as “caps” or “limits.”
“All such changes would simply impose a federal tax,” the resolution states.
Mark Crisson, APPA president and chief executive officer, underscored that all such proposals would have the same negative effect for issuers.
“Whether a cap, a limit, or a replacement, every alternative to the current-law tax treatment of municipal bonds would increase financing costs,” he said.
John Godfrey, senior government relations representative at APPA, said the group is fine with use of taxable securities as a supplement to tax-exempts, but strictly opposes using them as a substitute.
Public power agencies often bond for infrastructure construction and upgrades. The report analyzes the effect on small borrowers financing a $25 million project and large borrowers paying for a $250 million project under four scenarios designed to simulate implementation of the policy alternatives being discussed by lawmakers: current law, a full repeal of the muni exclusion, a 28% cap on the value of tax exemption, and a taxable, direct-pay bond in which the Treasury would provide the issuer with a subsidy payment of 25% of interest costs.
The results show that for a $250 million borrower with an A rating, a 28% cap would raise borrowing costs 24%. A direct-pay bond with a 25% subsidy payment would raise the cost 16%, while a full repeal of the tax exemption would create a 47% cost increase. For $25 million borrowers under the same scenarios, the costs would go up 27%, 17%, and 49% respectively.
The report notes that a 28% cap would fundamentally alter the market by changing the face of the investment community.
“This proposed change to the current tax code could eliminate a large segment of the investor base for tax-exempt bonds, forcing rates to rise close to taxable rates on a relative basis,” the report states.
Crisson warned that since the investments supported by bond financing are “absolutely necessary” to serve public power consumers, increased borrowing costs would inevitably have to be met by increasing rates for those customers.
“Public power providers service 47 million people nationwide,” Crisson said. “This report shows that if Congress and the President act to change the tax treatment of municipal bonds, they will have acted to raise rates on these consumers.”
Emphasizing the importance of tax-exempt bonds, the resolution states that APPA “will work with all stakeholders to ensure that this important financing tool remains available for now and for future generations.”