Tax-Exempt Status of Municipal Bonds on Chopping Block in President’s 2014 Budget

State, county, and municipal leaders across the country are concerned about a portion of President Obama’s FY 2014 budget that would omit the tax-exempt status of municipal bonds. The exemption is blamed for causing the federal government to lose an estimated $30 billion in revenue in 2012. However, according to the “Protecting Bonds to Save Infrastructure and Jobs 2013 Report,” tax-exempt municipal bonds are the most important tool in the United States for financing water systems, sewer systems, and other vital infrastructure such as roads and bridges. The report was released by the National Association of Counties, the National League of Cities, and the United States Conference of Mayors.

The study includes powerful supporting statistics, such as:

  • State and local governments financed more than $1.65 trillion of infrastructure investment between 2003 and 2012 through the tax-exempt bond market.
  • In the past decade, nearly $258 billion in tax-exempt bonds funded water and sewer facilities.
  • More than 6,600 tax-exempt municipal bonds financed over $179 billion worth of infrastructure projects in 2012.

This summer, members of the National Governors Association sent a letter to Senate Finance Chairman Max Baucus (D-Mont.) and Sen. Orrin Hatch (R-Utah) in opposition to the budget proposal. The letter requests that federal statutory and regulatory policies should “neither increase bond issuance costs to states and local governments, directly or indirectly, nor diminish retail and institutional demand for bonds issued by states and local governments,” because doing so, “would have the unintended consequence of chilling supply and demand for municipal bonds.”

As illustrated in the American Society of Civil Engineers’ (ASCE) 2013 Report Card for America’s Infrastructure, in order to adequately improve the nation’s infrastructure, a total investment of $3.6 trillion is needed by the year 2020. A majority of those projects would most likely be funded primarily by municipal bonds. Without the tax-exempt status, cities, counties, and states would be under additional financial pressure. The ASCE is also actively involved in efforts to preserve the tax-exempt status of municipal bonds.