For the third year in a row, President Obama’s budget request to Congress would cap certain tax deductions for high-income families – a provision that could drive up municipal bond borrowing costs for local governments. According to a budget summary released by the White House, the plan would “limit the tax rate at which high income taxpayers can reduce their tax liability to a maximum of 28 percent.” The limit would phase out the ability of high earners to claim a number of itemized deductions and other tax benefits, including tax-free interest earned on municipal bonds.
The current tax-exempt status of municipal bond interest leads investors to accept lower interest rates on the bonds, thus allowing communities to stretch their dollars further when selling bonds to finance water infrastructure improvements. But phasing out this benefit would likely cause these costs to rise, causing investors to demand higher interest rates from communities to make up the difference.
President Obama has recommended capping the value of tax exemptions for high-income earners several times in the past, but Congress never advanced any of the proposals. But just last week House Ways and Means Committee Chairman Dave Camp (R-Mich.) released his own tax reform plan that would impose a 10 percent surtax on certain income (including municipal bond interest) collected by the wealthiest taxpayers.
Despite these proposals, many members of Congress remain staunchly opposed to any rollback of municipal bond tax benefits. One of these members, Rep. Randy Hultgren (R-Ill.), who serves on the House Financial Services Committee, will address the issue next month as part of AMWA’s 2014 Water Policy Conference.