President Obama’s FY17 budget request asks Congress to impose new taxes on certain interest income earned by high-income taxpayers – a policy that if enacted would likely drive up municipal bond borrowing costs for local water utilities.
The plan is part of a package of revenue proposals released by the Treasury Department last week in conjunction with the President’s FY17 budget request. The plan targets certain types of income – including interest earned on municipal bonds, retirement contributions and employer sponsored healthcare costs – that are currently exempt from the federal income tax. The President’s plan would “reduce the value to 28 percent of the specified exclusions and deductions that would otherwise reduce taxable income in the 33-percent, 35-percent, or 39.6-percent tax brackets” – meaning that municipal bond interest earned by taxpayers in the top three tax brackets would be newly subject to some federal taxation.
AMWA and other municipal organizations have previously argued that imposing new taxes on municipal bond interest would lead wealthy investors to demand higher interest rates and thus force communities to pay higher financing costs when issuing bonds for water infrastructure improvements.
The proposal is unlikely to see action in Congress this year but could reemerge in 2017 if lawmakers undertake a major tax policy overhaul. AMWA is part of several coalitions working to preserve the current municipal bond interest exemptions and will continue to make those arguments on Capitol Hill this year.