If municipal issuers have not come out of the woodwork yet in favor of the tax exemption, this should just about do it. Federal trustworthiness now is in shambles regarding subsidy programs designed to replace the tax exemption. The programs applied only to certain types of bonds, the issuers of which now have suffered after-the-fact disadvantages of having accepted the benefits.

Two approaches for alternative, supposedly more efficient, “subsidies” were one, federal subsidies to be paid directly to issuers for interest on taxable bonds (Build America Bonds), and two, income tax credits for owners of taxable bonds: qualified zone academy bonds (QZABs), clean renewable energy bonds (CREBs), New CREBs, qualified energy conservation bonds (QECBs), qualified school construction bonds (QSCBs), and BABs.

In the first instance, the sequestration program has reduced the direct subsidies that the federal government agreed to pay taxable bond issuers. Years after issuance, municipal issuers are not receiving the full amounts of the subsidies they were promised. Municipal issuers relied upon that federal assurance at their own risk.

So much for that fine commitment. One lesson is that the federal government can “default” without penalties.

Regarding tax-credit bonds, it appears that Internal Revenue Service officials have been far too occupied with learning line dancing, when they should have been undertaking the more difficult tango with state and local officials. Astoundingly, school districts issuing QZABs, and other municipal issuers of tax-credit bonds, are learning (again, years after issuance) that the IRS is requiring them to file five reports per year: four quarterly reports and one annual one. The reports require calculations that many issuers are not well-equipped to compute without professional assistance — yet another unforeseen cost.

Additionally, the issuers are required to send owners of the tax credits information statements regarding the tax credits accruing to the owners. The tax-credit owners then are required to attach the notices to their tax returns. If the issuers have not provided the information, the tax-credit owners are required, in effect, to report the issuers on the owners’ tax returns.

This requirement was imposed surreptitiously, or at least quietly, without notice directed to issuer groups and without a real opportunity for issuers to comment. If they had been given the opportunity, the issuers would have been able to inform the IRS that its approach poses significant problems.

In many cases, when the tax-credit bonds were placed privately, the process of informing owners seems relatively straightforward, assuming the tax credits have not been stripped. Problems begin to arise, however, when stripping has occurred and issuers are not able to identify the owners.

The problems become much more difficult when tax-credit bonds were not sold privately, but rather the Depository Trust Co. was involved. In such cases, issuers do not know to whom the information should be provided. DTC and dealer participants in DTC may need to be involved in order to convey the information to the owners.

In classic IRS form, issuers are subject, of course, to penalties for failing to make IRS filings and failing to provide information to owners. Those penalties already are accruing for issuer failures to file for prior periods in 2013, even though many issuers still are unaware of the new requirements. Penalties mount as delays increase, with truly astronomical penalties under worst-case scenarios.

So, which is the more efficient process: tax exemption, on one hand, or on the other, reliance on supposed solid federal financial commitments and the tender mercies of federal bureaucracies?

If municipal issuers do not wish to face such difficulties (and in the long term, probably worse ones) on a permanent basis, the answer to that question must be drilled relentlessly by state and local officials into congressional awareness whenever tax “reform” proposals are advanced to eliminate the tax exemption.