The President and Congress are considering, as part of their deliberations on a tax overhaul of the income tax code, a reduction or repeal of the federal tax exemption on interest earned from State and Municipal bonds.
Nearly two-thirds of core infrastructure investments in the United States are financed with municipal bonds. In 2016 alone, more than $440 billion in municipal bonds were issued to finance the projects that touch the lives of every American citizen and business. They are the roads we drive on, schools for our children, affordable family housing, water systems that supply safe drinking water, courthouses, hospitals and clinics to treat the sick, airports and ports that help move products domestically and overseas, and, in some cases, the utility plants that power our homes, businesses and factories. These are the pro-growth investments which spur job creation, help our economies grow, and strengthen our communities.
A combination of local control and local responsibility makes municipal bonds an incredibly effective and efficient tool. Voters throughout the country overwhelmingly support tax-exempt municipal bonds, which are either approved by locally-elected officials or directly through bond referenda – fiscal federalism at its finest. This must help explain why the default rate is less than 0.01%. Federal tax exemption reduces the cost of issuing municipal bonds, but it is these voters who will pay the interest and principal on this debt. As a result, over the last decade overall state and local borrowing has actually declined in proportion to the economy, while still financing more than $2 trillion in infrastructure investments. And, if simply left alone, municipal bonds likely will finance another $3 trillion in new infrastructure investments by 2026.
This year alone, the City of New Port Richey issued tax-exempt municipal bonds to enhance its water/sewer collection system. The City has used tax exempt bonding to construct critical infrastructure, public safety facilities, water and sewer systems, and recreation facilities and playgrounds. The City prides itself in maintaining quality infrastructure while limiting the tax burden on the citizens.
A reduction or elimination of the tax exempt status on municipal debt will result in either fewer resources to finance these projects, or, increased cost which will be passed on to the public through higher taxes.