States and localities have issued nearly $258 billion in tax-exempt municipal bonds over the past ten years to pay for water and sewer infrastructure, according to a report released last week by the U.S. Conference of Mayors, the National League of Cities and the National Association of Counties.
The report is intended to serve as a preemptive strike against any efforts on Capitol Hill to reduce or eliminate provisions in the tax code that allow investors to earn tax-free interest on municipal bond investments. In the past, some lawmakers have proposed curtailing the tax exemption as a way of reducing the federal budget deficit, but this would lead to states and localities paying higher borrowing costs as they finance infrastructure upgrades.
The report, Protecting Bonds to Save Infrastructure and Jobs, finds that state and local governments have financed more than $1.65 trillion worth of infrastructure investment through tax-exempt bonds over the past ten years – including the $258 billion figure for water and sewer systems. The paper also compares the potential cost of two proposals to modify the exemption: one that would eliminate it completely and another that would impose a 28 percent tax-benefit cap on the itemized deductions and exclusions of certain taxpayers.
According to the paper’s calculations, states and localities would have paid an additional $173 billion in interest costs over the past ten years under the 28 percent cap proposal and an additional $495 billion in interest costs if the tax-exemption were repealed completely. These figures represent the additional interest costs on the financing of all forms of infrastructure, not just water projects.
AMWA recently joined Municipal Bonds for America, a coalition of bond issuers and state and local governments working to educate members of Congress of the value of tax-exempt municipal bonds.