The fiscal year 2016 budget request sent to Capitol Hill by President Obama on February 2 includes both good news and bad news from a water infrastructure funding perspective. The good news is that the document would boost appropriations for EPA’s Drinking Water State Revolving Fund (DWSRF) while also allotting funds for the agency to continue development of the new Water Infrastructure Finance and Innovation Act (WIFIA) loan program. The bad news is that the budget would impose new taxes on some interest earned on municipal bonds – likely causing muni bond rates to rise.
These were among the hundreds of funding and policy requests included in the President’s $4 trillion plan to fund the federal government for the 2016 fiscal year. There is no chance of Congress approving the proposal in its entirety – in fact, much of the document will likely be ignored by Republican lawmakers – but the budget sheds light on the administration’s spending priorities, and represents the starting point of the year’s appropriations process.
The President’s $8.6 billion plan for EPA would provide the DWSRF with $1.186 billion next year, $279 million above the program’s enacted FY15 level and an amount that would represent its highest annual appropriation since the 2010 fiscal year. The White House proposal would even fund the DWSRF at a higher level than the Clean Water SRF, which would see its funding cut by $333 million to $1.116 billion. Funding for the two SRF programs combined would see a net reduction of $54 million under Obama’s plan.
The budget would continue a requirement that states reserve between 20 and 30 percent of their DWSRF funding to support loan forgiveness in disadvantaged communities. States would not be required to set aside a specific portion of DWSRF funding for “green infrastructure” projects, while at least 20 percent of CWSRF dollars would have to be spent this way.
For WIFIA, the budget seeks $5 million for EPA “to begin developing the information necessary to lay the groundwork” for the new program. While the budget does not specify if any portion of the WIFIA funds would be available for EPA to offer as loans, at minimum the $5 million request is a vote of confidence in WIFIA that signals to Congress that the administration is behind the program. Combined with the nearly level funding requested for the SRFs overall (especially compared to the $541 million SRF cut the White House requested last year), the budget should assuage fears that WIFIA could only receive funding at the expense of the SRFs.
Beyond the EPA budget, the President’s plan includes a proposal that could lead to higher interest rates for communities that pay for infrastructure upgrades through municipal bonds. New tax policies proposed in the budget would “limit the value of itemized deductions and other tax preferences to 28 percent.” In effect, this would result in new taxes on municipal bond interest for some wealthy investors.
To demonstrate, 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.
This is not the first time President Obama has sought to tax municipal bond interest, but his ongoing focus on the issue could put it on the table for negotiation if lawmakers attempt to hammer out a comprehensive tax reform plan this year. As this process plays out, AMWA and other municipal organizations will argue against any plan that would force communities to pay higher financing costs when undertaking water infrastructure improvements.