President Obama’s proposal to scale back federal tax incentives tied to municipal bond interest became the target of a letter sent to the White House on March 27 by AMWA and other municipal sector organizations. Organized by the U.S. Conference of Mayors’ Don’t Mess With Our Bonds Coalition – of which AMWA is an active member – the letter urges the White House to drop its call for new taxes on municipal bond interest.
The letter was spurred by President Obama’s FY16 budget request, which once again proposed new tax policies that would “limit the value of itemized deductions and other tax preferences to 28 percent.” The plan, designed to make wealthy individuals and households pay more taxes, would scale back the municipal bond tax benefit for these investors, and thus likely cause municipal bond interest rates to rise.
For example, under current law an individual in the top 39.6 percent tax bracket effectively enjoys a tax reduction of 39.6 cents for every dollar of municipal bond interest earned in that bracket. But under the White House proposal the marginal tax reduction would be capped at 28 cents per dollar – making municipal bonds a less attractive investment for wealthy individuals and families. To make up for the reduced gains, investors would likely demand higher interest rates on municipal bonds – pushing borrowing costs higher for communities.
In the letter, the Don’t Mess With Our Bonds Coalition explains that tax-exempt municipal bonds have financed “over $3 trillion in critical infrastructure” over the past decade, and that new taxes on bond interest would “clearly increase the borrowing costs of state and local governments and create uncertainty for investors.”
The coalition also sent a similar letter to U.S. Senate leaders, urging them to reject any proposal to roll new municipal bond taxes into a comprehensive tax reform plan lawmakers may consider this year.
The fiscal year 2016 budget marks the fourth year in a row that President Obama has proposed new taxes on municipal bond interest, and the proposal has yet to gain traction on Capitol Hill – though tax reform discussions are expected to put a lot of revenue-raising ideas on the table for debate.