America needs tax-exempt municipal bonds

Congress must maintain the tax-exempt status of municipal bonds in its tax reform discussion this year if we truly want to transform and make critical upgrades to our national infrastructure.

In his 2014 State of the Union address, President Obama proposed capping the tax exemption of municipal bonds for investors, an idea that is still under consideration today. Other proposals have been made to subject municipal bonds to a surtax, effectively taxing investors on a significant portion of municipal bond interest. But at a time when we should be encouraging investment in infrastructure, these proposals would have devastating consequences on public works projects.

The World Economic Forum ranked the United States 12th in the world in the quality of overall infrastructure in its Global Competitiveness Report — putting us well behind countries like Singapore, United Arab Emirates, the Netherlands and Taiwan. According to the American Society of Civil Engineers, the nation needs to spend $3.6 trillion by 2020 to meet its critical infrastructure needs.

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While today’s proposal by Obama for a new Qualified Public Infrastructure Bond (QPIB) may increase infrastructure investment by permitting public-private partnerships to tap into previously unavailable funding sources, the proposal is not a panacea for infrastructure investment. Traditional tax-exempt municipal bonds remain the primary tool for the financing and construction of schools and other basic infrastructure needs.

State and local governments are responsible for three-quarters of all U.S. public infrastructure projects and for more than 100 years have relied upon tax-exempt municipal bonds to fund these projects. Tax-exempt muni bonds have helped fund approximately $49.5 billion in infrastructure projects in the state of Washington and $18.9 billion in Tennessee over the past decade.

Municipal bonds offer investors a strong repayment rate and an attractive tax-exemption for interest earned on their investment. In return, state and local governments receive much-needed funding to finance everything from highways to schools to sewage systems.

If Congress accepts the president’s proposal, which would cap the tax exemption at 28 percent of the top 2 percent of income earners, investor interest in funding such projects would plummet, leaving already-stretched state governments to shoulder the burden. Eliminating or reducing the tax exemption in any manner would drive up the cost of borrowing, resulting in fewer projects, fewer jobs and deteriorating infrastructure — an outcome that leaders on both sides of the aisle should agree is unacceptable.

To put this in context, if the tax-exemption limit had been in place from 2003 to 2012, state and local governments would have paid an extra $173 billion in interest on infrastructure investments. A June 2013 report by HIS Global Insight suggests this would have negatively impacted 311,000 jobs and $24 billion in GDP. Moody’s suggests that over the next 10 years, a cap on tax exemption would result in a net loss of 78,000 jobs and $15 billion in infrastructure investment. This is a significant shortfall that Congress is unlikely to cover.

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As tax reform is debated in Congress over the coming months, we urge members to consider the impact a change in the tax-exempt status of municipal bonds would have on their communities. Over a century ago, state and federal leaders recognized the importance of this issue and agreed that the income from municipal bonds would never be subjected to a tax — a principle codified by the 16th Amendment. We ask you to stand by that commitment and resist a radical change to an efficient market.

The National Association of State Treasurers adamantly opposes any change to the tax exemption of municipal bonds. With every corner of the nation in need of infrastructure investment, preservation of this effective funding mechanism — one that benefits Americans from all walks of life — is too valuable to risk.

Lillard is Tennessee state treasurer and president of the National Association of State Treasurers. McIntire is Washington state treasurer and senior vice president of the National Association of State Treasurers.