NAST Tells Congress: Don't Tax Municipal Bonds

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Forty-two state treasurers are urging members of Congress to maintain the tax-exempt status of municipal bonds, claiming that any changes will result in long-term, adverse ramifications for the country’s public infrastructure.

“The need to build and maintain our public infrastructure has never been more acute,” Virginia state treasurer Manju Ganeriwala, president of the National Association of State Treasurers, wrote in a two-page letter to the House Ways and Means Committee. “Eliminating or reducing the tax exemption will greatly limit our ability to address these needs, resulting in fewer projects, fewer jobs and deteriorating infrastructure.”

The letter was addressed to House Ways and Means Committee chairman Rep. Dave Camp, R-Mich., and ranking minority member Rep. Sandy Levin, D-Mich.

States and localities save an average of 25% to 30% on interest costs when using municipal bonds as opposed to taxable bonds, Ganeriwala said in the letter. At a time when cash-strapped state and local governments continue to search for additional revenue and plug budget holes, the ability to save money on infrastructure financing is essential, she noted.

“Eliminating the tax exemption will cause states and localities to pay higher borrowing costs,” she said. “As a result, municipalities will be forced to either curtail infrastructure projects or raise taxes on sales, property or income. Any increase in taxes will likely fall heavily on the middle class.”

The letter pointed out that nearly three-quarters of all public infrastructure projects in the U.S. are built by state and local government entities. Muni bonds are the primary tool used to update and construct highways, bridges, airports, schools, water and wastewater projects.

In a recent American Society of Civil Engineers report, the U.S. should spend $2.75 trillion by 2020 in order to meet critical infrastructure needs.

“Much of the responsibility for addressing these needs rests with states, counties and cities,” said Ganeriwala.

The letter also urged the lawmakers to oppose President Obama’s proposal to cap the value of tax exemptions at 28%, which he included in his fiscal 2014 budget.

The cap, which would be applied retroactively, would “have a disruptive effect on the bond market” and “reduce the value of bonds held by investors and the expected return on their investment,” Ganeriwala said in the letter.

NAST and other market participants vehemently oppose the president’s 28% cap proposal, arguing that the municipal bond market has been working effectively for over a century and that such a change would shift the burden to state and local governments. They also said it would increase borrowing costs and delay much needed infrastructure projects.

Ganeriwala pointed out that municipal bonds have a strong repayment record, higher than that of corporate bonds, which allows state and local governments to borrow responsibly.

NAST made a similar plea to members of Congress and White House officials in February when several of its members came to Washington, D.C. and met with lawmakers and administration officials to discuss the potential consequences of changing the tax-exempt status of muni bonds.

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