MBFA Expresses Support for Muni Exemption in Letter to Senators

WASHINGTON – The Municipal Bonds for America coalition has sent a letter in support of the tax exemption for municipal bonds to the co-chairs of a Senate Finance Committee tax-reform working group.

“Just as state and local governments should not — and could not — shift their costs by taxing federal bonds, the federal government should not try to shift its costs to state and local governments — and our state and local residents — by imposing an unprecedented tax on municipal bonds,” the coalition wrote.

The coalition’s letter, dated Thursday, was sent to Sens. Dean Heller, R-Nev., and Michael Bennet, D-Colo., the co-chairs of the finance committee’s tax reform working group on community development and infrastructure. It was copied to the other members of the working group: Sens. Dan Coats, R-Ind., Maria Cantwell, D-Wash., Tim Scott, R-S.C. and Bill Nelson, D-Fla.

The letter was signed by several members of the coalition, including the American Public Power Association, the Bond Dealers of America, the National Association of Bond Lawyers and the National Association of Local Housing Finance Agencies.

“It is no exaggeration to say that bonds build America,” the coalition wrote. Munis finance infrastructure including roads, highways, airports, water and sewer facilities, schools, hospitals, housing, and power facilities.

The federal tax exclusion for muni interest, the financial strength of issuers and the stability of the bond market have led to lower borrowing costs for state and local governments, according to the letter.

“Projects financed with municipal bonds over the last decade cost $495 billion less than if they had been financed with taxable debt. Lower borrowing costs for bond-financed projects allow for greater investment, reduce tax and utility rates for residents, and help create jobs and economic growth,” MBFA wrote. “Alternatives to bond financing exist, but each has substantial shortcomings, predominantly increased cost of borrowing. So, while these could supplement bond financing, they could never replace bond financing.”

MBFA also wrote that state and local debt levels has remained stable, since bonds are frequently approved by voter referendum or a governmental body and the debt service is paid by state and local residents. The 40-year default rate for munis is 0.13%, while the default rate for comparably rated corporate bonds is 11%, the letter stated.

Additionally, the coalition pointed out that about 72% of bond interest is paid to individuals, either directly or through mutual funds and similar vehicles. Roughly 60% of household bond income goes to people over 65, and about half goes to investors with incomes of less than $250,000.

“Households purchase bonds because of the stability of the municipal bond market and the safety of the investment,” the group said in the letter. MBFA pointed out that investors accept lower interest rates on munis in exchange for the tax exemption, “reducing or eliminating any tax ‘windfall.’”

The tax reform working groups are expected to submit a report with recommendations to Senate Finance Committee chairman Orrin Hatch, R-Utah, and ranking minority member Ron Wyden, D-Ore., in May. The working groups’ efforts are intended to lead to tax-reform legislation being introduced later this year.

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