A spate of municipal bond issuance this year is fueling a wide range of infrastructure projects across the country.
Analysts say as much as $400 billion in muni bonds may be sold this year, nearly a record high, to improve schools, airports, roads and other infrastructure.
The low-interest rate environment is encouraging cities and states to not just repay debt issued at higher cost, but to also plow additional funds into infrastructure projects, ranging from water and sewer improvements in California, a new terminal at New York’s LaGuardia Airport to new road work in Texas, noted Bloomberg.
It’s a strange time, then, for calls to change or eliminate the tax exemption.
Fighting the muni bonds exemption
As we noted earlier, (“Too Many Potholes Filled? Blame The Muni Exemption”), efforts are afoot to change or eliminate the exemption.
An outline for major tax changes released by House Speaker Paul Ryan in June sparked concern that the exemption on muni bonds may be changed or eliminated. Meantime, the Obama administration has proposed limiting the exemption since 2011, and a think-tank recently released a study that called the exemption “unideal.”
State and local leaders, however, are pushing back.
Leaders: Munis cut costs on projects
In a letter to Congress urging members to maintain the exemption, more than 600 state and local officials said three quarters of all public infrastructure projects in the United Sates are built by states and local government, “and tax-exempt bonds are the primary financing mechanism for these essential projects.
“Municipal bonds have a very strong repayment record – much higher than corporate bonds – allowing state and local governments to borrow responsibly for capital projects, providing a safe and reliable investment option for our citizens,” the letter said.
Further, tax-free bonds shave an average of 25% to 30% off interest costs compared to taxable bonds because investors are willing to accept a lower interest rate on munis.
Officials estimate 87% of infrastructure spending on utilities is financed by tax-free bonds, while munis finance 65% of education projects. In a contentious political year, infrastructure investment is a rare point of agreement among both major presidential candidates.
So far this year, $272 billion in municipal bonds have been sold, with $16 billion scheduled over the next month, according to Bloomberg, a leap from $6.9 billion planned for July.
It’s hard to imagine the exemption will be scuttled – and we doubt it will – but it behooves our lawmakers to keep in mind the value muni bonds offer as effective, widely used tools to fund much needed public works projects.