Counties would have paid an extra $9 billion in increased interest costs if municipal bonds had been taxable and $3.2 billion if a 28% cap on the value of tax exemption had been imposed during the last 15 years, according to a report by the National Association of Counties.

The 32-page report, “Municipal Bonds Build America: A County Perspective on Changing the Tax-Exempt Status of Municipal Bond Interest,” published by NACo late last week, estimated the cost of a complete repeal of the tax exemption and a proposed 28% cap on 3,069 counties.

Large counties with more than 500,000 residents would have shouldered more than half of the cost of higher interest costs But small counties would risk the most, possibly losing access to the muni market.

Counties, states and localities would have paid $173.4 billion more in interest between 2003 and 2012 with a 28% cap on the tax exemption of bonds used to finance the 21 largest bond-financed infrastructure projects over the last 10 years. If municipal bonds were completely repealed that cost would have soared to nearly $500 billion, according to the report.

Between 2003 and 2012, counties, states and other localities invested $3.2 trillion in infrastructure through long-term municipal bonds, two-and-one-half times more than the federal government, the report said.

“Any tax imposed on currently tax-exempt municipal bond interest will affect all Americans, as investors in municipal bonds and as taxpayers securing the payment of municipal bonds,” the report said.

The report comes as lawmakers on Capitol Hill have been examining all sections of the Internal Revenue Code in preparation for comprehensive tax reform. Lawmakers have said that all deductions, expenditures and exemptions are on the table for review.

The report used three different case studies of counties — Franklin County, Ohio; Montgomery County, Md., and Baltimore, Md., — to demonstrate how each would weather a change in the tax exemption.

In addition, the report ranked counties according to highest additional costs if a 28% cap or full repeal were imposed. The city and county of San Francisco, Calif., ranked first. If a 28% cap were imposed, San Francisco would pay $64.2 million more in interest costs and $183.4 million more if tax exemption were completely repealed.

“Counties welcome additional funding and financing tools for infrastructure because of the numerous needs of the U.S. infrastructure system,” the report said. “The creation of these tools should be additive and not substituted for the successful, well-established tax-exempt municipal bond market that provides access to an unmatched range of issuers, especially small issuers.”

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