WASHINGTON – The Municipal Bonds for America coalition is urging members of the House Ways and Means Committee to support tax-exempt bonds, including private activity bonds.
“The investments financed with these bonds have a proven track record to help our economy grow and create jobs,” 12 state, local, investor and other MBFA groups told committee members in a letter sent to them on Monday after the start of their tax reform hearings.
The groups said that while some have suggested that a surtax or cap on bond interest could raise revenue for the federal government without increasing the interest rates demanded by investors, such a tax or cap, would actually reduce the value of all bonds in the secondary market by as much as $200 billion.
“It would also disproportionately hurt seniors,” they wrote. “About three-fifths of bond interest paid to individuals is paid to those aged 65 years and older and 84 percent is paid to those aged 55 and older.”
In addition, they wrote, investors would demand higher rates of return to: accommodate the surtax; reflect the bond’s loss of value in the secondary market; and compensate for the risk that Congress will expand the tax to hit more bondholders, increase the tax rate imposed, or both.
One need look no further than qualified private activity bonds, most of which are subject to the alternative minimum tax, to see an example of this. The AMT “is effectively a surtax beyond the regular income tax that is paid by taxpayers above a certain minimum income level,” the coalition said, and it costs issuers as much as 50 basis points more in interest rates than another non-AMT similarly rated tax-exempt bond.
The groups pointed to the Dallas/Fort Worth International Airport, which used tax-exempt PABs subject to the AMT to help finance $3.1 billion of its massive terminal improvement project. The airport paid $268 million more than if it had used fully tax-exempt bonds, they said.
During the last decade state and local governments made about $2 trillion in bond-financed infrastructure investments and they are expected to invest $2 trillion to $3 trillion in infrastructure over the next decade, the groups wrote. States and localities build nearly three-quarters of the nation’s core infrastructure, using tax-exempt bonds for most of the financing, they added.
“It is vital that [tax reform] not impose an unprecedented federal tax – in any form – on these investments,” the groups told the lawmakers.
State and local governments issued about $400 billion of muni bonds in 2015. Of those, about $85 billion were used for primary and secondary schools, $39 billion financed investments in colleges and universities, $50 billion were used for roads, bridges, ports, airports, mass transit and other transportation facilities, $38 billion financed water and sewer projects, $27 were used for hospitals and clinics and $18 billion financed electric utility projects, the groups said.
“These are investments that make commerce possible and our communities strong and livable,” they added.
The groups said that private activity bonds were also used to finance public-private projects. In 2015, they said, about $8 billion were used to finance transportation-related projects such as airport terminals and port facilities. Another $6.7 billion was used for rental housing and $4.6 billion for affordable mortgages. In addition $700 million of PABs helped finance state and local student loan programs, and $250 million was used for industrial development projects and farm facilities.
The groups told the lawmakers that while alternatives to tax exempt bonds exist, each has substantial shortcomings -- primarily increased borrowing costs, added complexity, and a lack of access for smaller issuers. Public-private partnerships may supplement tax-exempt bonds, but these and other alternatives can’t replace them, they said.