The case for tax-exempt municipal bonds for 21st Century America
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Every day, hundreds of millions of Americans wake up, hop in the shower, brush their teeth, and head to school or work. They may walk or bike on sidewalks, drive on roads or highways then park on the street or in a public garage. Maybe they ride a subway, bus or regional train. Neighborhood police and fire stations protect their homes and businesses; hospitals and clinics stand ready to treat the injured or ill; and trash is hauled to dumps or incinerators. At the end of the day, we can relax in neighborhood parks, study at the local library, or attend a council meeting in the town hall.

These are the things that we take for granted, but which are absolutely essential to our lives and wellbeing, our businesses and our commerce. They can be built privately and often are built with some amount of direct federal aid. In reality, though, roughly two-thirds of all core infrastructure built in the U.S. is built by state and local governments and financed with tax-exempt municipal bonds.

For example, Washington D.C., may be considered a federal city, but much of its infrastructure – its bread and butter – is being financed with municipal bonds. More than 200 public elementary and secondary schools serving nearly 50,000 students are maintained and modernized by the issuance of tax-exempt municipal bonds.

The Children’s National Medical Center, Columbia Hospital for Women Foundation, and the Greater Southeast Healthcare System all fund capital projects by issuing tax-exempt municipal bonds. The District of Columbia Water & Sewer Authority uses tax-exempt municipal bonds to keep water flowing to taps and to collect and treat the wastewater that results. And all across America, in small towns and big cities, municipal bonds play the same vital economic role.

The story of Columbia, S.C., my home city, is a story of a remarkable renaissance with 25 years of growth and success. It is also a story of infrastructure investment, financed largely by tax exempt municipal bonds. Since 1990, the City has invested hundreds of millions of dollars in our core infrastructure: streets, sidewalks, water, sewer, parks and cultural institutions. These investments have paid off in the form of rising population and job growth, a thriving downtown, and a revitalized central city. Almost all of these investments were financed by tax exempt municipal bonds. So, I am being literal when I say that bonds build Columbia, and bonds build America.

My concern is that federal lawmakers may impose an unprecedented tax on municipal bonds as they will soon debate the merits of tax reform. Bond interest has been exempt from federal tax since the federal income tax’s first inception in 1913 – just as federal bond interest is exempt from state and local tax. Investors who buy these bonds to build America are lending their own funds and are willing to accept a lower rate of return than on other investments because they don’t have to pay federal income tax on the interest they receive. If we take away this tax-exempt status, investors will demand a higher rate of interest resulting in higher state and local taxes or fewer state and local investments.  

State and local governments are just beginning to recover from the Great Recession, and lackluster economic outlook means continued projected shortfalls in state and local pension funds. The last thing that we need to do is make their tough choices more difficult. An unprecedented federal tax on municipal bond interest would do just that by increasing state and local borrowing costs.

Put another way, the best way to ensure that we can continue to repair crumbling roads, bridges, water systems, and schools is to not impose a new federal tax on critical infrastructure investments.

Stephen K. Benjamin is mayor of Columbia, S.C. He is Chair of the Municipal Bonds for America Coalition.

The views expressed by this author are their own and are not the views of The Hill.