The Association of Metropolitan Water Agencies (AMWA) urges Congress to place no limitations on the ability of water systems to use tax-exempt bonds to finance water infrastructure projects. This authority to finance essential governmental services on a tax-exempt basis is vital to the ability of metropolitan water agencies to continue to provide high quality, safe and reliable supplies of drinking water at a price that is affordable to ratepayers.
AMWA also supports the restoration of advance refunding bonds, which previously allowed water systems and other public issuers to take advantage of interest rate reductions to realize financing savings for ratepayers. When Congress ended the tax exemption for interest earned on advance refunded bonds, it reduced their attractiveness to investors and took these savings opportunities off the table.
When considering future tax policy changes,Congress must keep in mind that any new tax revenue collected by limiting or eliminating tax-exempt interest earned on municipal bonds would be offset by increased interest costs that would be borne by local water system ratepayers. Limiting or eliminating the exemption would therefore represent a de-facto tax hike on local communities, while encumbering public water agencies’ efforts to raise needed capital to address water supply needs.
Additionally, Congress should pursue policies that allow community water systems to utilize tax-exempt funds in the most efficient manner, and which minimize red tape that slow down the completion of critical projects. For example, Congress should reform portions of the tax code that make it challenging for communities to finance full lead service line replacements with tax-exempt debt.
Rationale:
- Federal investments only represent about four percent of total spending on the nation’s water infrastructure each year1, and tax-exempt bonds are the most common source of capital financing used by localities to a pay for their own water infrastructure projects.
- Taxing municipal bond interest would dramatically increase nationwide water and wastewater infrastructure financing costs – effectively imposing a new tax on municipalities and utility ratepayers.
- Restriction or elimination of tax-exempt interest would seriously erode the ability of AMWA member agencies to meet existing and anticipated needs, including any new drinking water quality standards.
- Restriction or elimination of such tax-exempt interest would constitute a fundamental departure by the federal government and could threaten the ability of state and local governments to finance basic governmental facilities and services.
- Between 2013-2017 the advance refunding of municipal securities saved U.S. taxpayers at least $12 billion – which in the water sector translated to savings for water and wastewater ratepayers.
- Restrictive arbitrage provisions unnecessarily increase the costs of project financing.
- The “private business use test” in Section 141 of the Internal Revenue Code has slowed the completion of lead service line replacement projects that are financed locally with tax-exempt bonds, interfering with efforts to remove these lines expeditiously.
1 "Bridging the Gap: The Power of Investment in Water,” Value of Water Campaign, May 2024.