No Cap! Groups Lobby Against Municipal Bond Proposal

Municipal groups are lobbying against a proposal to impose a 28% cap on deductions and exemptions from municipal bond interest as a way to raise new federal revenues. They warn the cap would raise state and local borrowing costs by up to 70 basis points.

Apr 1st, 2013

Municipal groups worry a proposed 28% cap on deductions and exemptions from municipal bond interest could harm infrastructure funding

By Patrick Crow, Washington Correspondent

Municipal groups have admonished Congress not to restrict the benefits of tax-exempt municipal bonds in order to help alleviate federal fiscal woes.

In "fiscal cliff" negotiations last year, the White House and congressional Republicans discussed a 28% cap on deductions and exemptions from municipal bond interest as a way to raise new federal revenues. No action was taken. Such a limitation effectively would raise borrowing costs for communities financing water infrastructure projects.

Now the U.S. Conference of Mayors, The National League of Cities and the National Association of Counties (NACo) have launched a preemptive strike against its revival. They have issued a report detailing the importance of municipal bonds to building infrastructure.

The Association of Metropolitan Water Agencies (AMWA) is supporting their effort. It also has joined the Municipal Bonds for America coalition that is lobbying against tax changes.

The report from the three municipal groups said that in the last decade, state and local governments financed more than $1.65 trillion of infrastructure investment using tax-exempt bonds - including $258 billion in water and sewer facilities.

It said if the proposed 28% cap had been in effect during that time, the borrowing costs to states and localities issuing these bonds would have increased by $173 billion and would have prevented many infrastructure projects from moving forward.

The report said in 2012 alone, more than 6,600 tax-exempt municipal bonds financed $179 billion worth of infrastructure projects - the bulk of which were primary and secondary education, water and sewer facilities, and hospitals.

It said that curtailing the tax exemption would raise costs for financially strapped state and local governments and would result in less investment in infrastructure - at a time when jobs are scarce and the physical state of public works and infrastructure is deteriorating.

Chris Rodgers is NACo president and a commissioner in Douglas County, Nebraska. He said, "Tax-exempt municipal bonds are the single most important tool that counties use for financing our critical infrastructure. Any change … risks local public works projects that benefit communities and puts into question the nature of the U.S. federalist partnership.

"In effect, the 28% cap on tax-exempt interest would be borne almost exclusively by state and local governments in the form of higher interest rates on their borrowing. Market analysts have estimated that this proposed tax on municipal bond interest would raise state and local borrowing costs by up to 70 basis points (0.70 percentage point) or more.

"Because the tax would apply not only to new state and local borrowing but also to all outstanding bonds, investors would be taxed on investment which they reasonably expected would be tax-exempt as long as they are outstanding - an unprecedented form of retroactive taxation," he said.

Jim Philipps, NACo media relations manager, said the report was not just window dressing. "We are pushing this really aggressively on Capitol Hill. Many of our members are hitting the Hill as we speak, talking to their congressmen.

"Tax-exempt bonds are fundamental to what we do. If Congress changes that tax policy, it's not going to hurt investors, it's going to hurt counties," he said.

WIFIA Advances

Water groups were heartened when Sen. Jeff Merkley (D-Ore.) recently reintroduced the "Water Infrastructure Finance and Innovation Act" (WIFIA), which would create a program to support large ($20 million plus) water infrastructure projects. The Environmental Protection Agency fund would supplement the existing state revolving funds for drinking water and wastewater construction projects.

Sen. Barbara Boxer (D-Calif.), chairman of the Senate Environment and Public Works Committee, is expected to include WIFIA in a larger water infrastructure bill that the panel may consider this year.

Diane VanDe Hei, AMWA executive director, said, "WIFIA is designed to think big. The program will provide a new stream of low-cost loans to America's cities, helping these communities rebuild their aging water infrastructure while utilizing rock-bottom interest rates."

David LaFrance, executive director of the American Water Works Association (AWWA), said "The time is right for real, workable solutions to the nation's unprecedented water infrastructure challenge."

AWWA has estimated that the nation will need more than $1 trillion over the next 25 years to replace and expand aging drinking water infrastructure - and wastewater needs will be similar.

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