Local officials continue to be concerned about discussions on Capitol Hill regarding capping or removing the tax exemption on municipal bond interest. While this issue was considered during the fiscal cliff negotiations in late 2012, the final compromise didn't include any changes to this exemption. However, as the administration and Congress look for revenue to address the deficit or to fund programs, this exemption remains under threat.
"The members of our congressional delegation need to hear from local officials about how this possible change to tax exempt bonds could dramatically increase the cost to cities of building infrastructure in our cities and towns," says Clinton Mayor Randy Randall, president of the Municipal Association. "We are very concerned that this proposal could strangle growth just as many local economies are beginning to recover from the recession."
Why is the tax exemption for municipal bonds important to cities and towns?
When cities and towns need to make a large capital investment in public infrastructure, they often sell municipal bonds to finance the project.
Investors in municipal bonds are generally exempt from paying federal income tax on the bond interest payments. Even a partial income tax on otherwise tax-exempt interest would cause investors to demand higher returns on their municipal bond investments to make up for the tax they would have to pay. The outcome would be higher borrowing costs for state and local governments, less investment in infrastructure and fewer jobs.
Why are municipal bonds exempt from federal taxes?
The federal tax exemption on municipal bond interest has been in place since the very first federal income tax was enacted in 1913. As a result, state and local governments save, on average, two percentage points on their borrowing to finance investment in public infrastructure. This exemption has generated trillions of dollars of investment in public infrastructure and has saved taxpayers hundreds of billions in interest costs.
When would the exemption go away?
One proposal being discussed would apply to interest on bonds already issued by governments and purchased by investors. This would represent a violation of the basic assumption of investors that Congress will not change the terms governing the taxability of interest for bonds already outstanding. In the nearly 100 year history of the tax exemption, Congress has never applied a retroactive tax to bonds already held by investors.
What can we do?
Write or call your U.S. representatives and senators today. Tell them to support maintaining the tax exemption on municipal bonds.
Senator Lindsay Graham
290 Russell Senate Office Building
Washington, DC 20510 - 202.224.5972
Senator Tim Scott
117 Hart Senate Office Building
Washington, DC 20510 - 202.224.6121
Congressman Joe Wilson
2229 Rayburn House Office Building
Washington, DC 20515
202.225.2452
Congressman Jeff Duncan
116 Cannon House Office Building
Washington, DC 20515 - 202.225.5301
Congressman Trey Gowdy
1404 Longworth House Office Building
Washington, DC 20515 - 202.225.6030
Congressman Mick Mulvaney
1004 Longworth House Office Building
Washington, DC 20515 - 202.225.5501
Congressman Jim Clyburn
2135 Rayburn House Office Building
Washington, DC 20515 - 202.225.3315
Congressman Tom Rice
325 Cannon House Office Building
Washington, DC 20515 - 202.225.9895
For additional information, contact Reba Campbell at 803.933.1245.