As federal tax reform looms, many state and local governments want to make sure any reform proposal maintains the tax exemption for municipal bonds, the National Association of State Auditors, Comptrollers, and Treasurers said.
The exemption of tax on municipal bonds has existed since the Sixteenth Amendment to the Constitution in 1913. The exemption allows states and municipalities to finance public projects at a lower finance rate than borrowing on the open market. Such projects include the construction and maintenance of schools, streets, highways, hospitals, bridges, low-income housing, water and sewer systems, ports, airports and other public works.
This exemption results in savings for local taxpayers while offering interest free of federal tax, and in many cases, state tax, for investors, NASACT added. The group said the financing vehicle is efficient, low-cost and assists in creating essential jobs.
A proposal to repeal or limit the tax exemption would drive up the costs of building infrastructure, which in turn could cause state and local governments to scale back or eliminate public projects, NASACT officials stated.
If investors see less of a tax break, they could demand higher interest to make up for the loss or move their funds to other investments where they would receive favorable tax treatment. This would result in higher borrowing costs for governments, the organization argued.