Defending the muni-tax exemption – and the fiscal health of state and local governments – seems to be bridging Washington’s great divide.
In an unusual scenario, politicians and officials from across the country, representing both major parties, are virtually unanimous in their opposition to proposals that imperil the 100-year-old exemption.
The thinking behind these measures is that in a period of high federal debt and cost-cutting fervor, the exemption is simply a loophole for the rich. Missing from this logic, however, are the vital benefits that accrue to cash-strapped states and municipalities.
“Our communities are in trouble. Their primary means of funding new roads, schools, hospitals and police stations – as well as the hundreds of thousands of jobs these infrastructure projects create – are in jeopardy,” reads a letter co-signed by Rep. C.A. Dutch Ruppersberger (D-Md.) and Rep. Randy Hultgren (R-Ill.), circulated to their fellow members of Congress.
The congressmen urge their colleagues to mobilize against proposals to limit or eliminate the deduction. It notes that tax-exempt municipal bonds “have funded more than $1.9 trillion in infrastructure construction in the last decade alone, mostly financing the construction and refurbishment of schools, hospitals, airports, water and sewer lines, public utilities, roads, and other transit projects.”
Cap still alive in president’s budget
Although Congress avoided tinkering with the exemption during the last “fiscal cliff” skirmish, the president’s 2014 budget proposal still would cap the exemption on interest income at 28 percent.
Though bipartisanship efforts are rare on Capitol Hill, widespread opposition to changing the exemption isn’t surprising: The effects on states and municipalities, whose fiscal positions are already stressed, would be significant.
“The math is simple,” according to an op-ed piece by Stephen Shapiro, deputy solicitor general in the Reagan administration, and Timothy Bishop, a former law clerk for Supreme Court Justice William Brennan. “Instead of paying 3.5% on long-term bonds, states and localities would have to offer 6% at a time when their budgets are already stretched.”
Put another way: “If the proposal to impose a 28-percent benefit cap on tax-exempt interest had been in effect during the last decade, it is estimated that this would have cost states and localities an additional $173 billion in interest expense for infrastructure projects financed over the past ten-year period,” according to a National League of Cities report titled “Protecting Bonds to Save Infrastructure and Jobs 2013.”
Who would pay for such a proposal?
Earlier this year, the American Society of Civil Engineers released a report assessing the country’s infrastructure. The grade… D+. According to the group’s estimates of current and expected spending, the United States would face a $1.6 trillion shortfall in funding infrastructure improvements.
It’s hard to imagine how disrupting an efficient and effective market that provides financing for key components of commerce and public services would help rebuild our economy.
If the exemption is compromised, everyone loses – investors and ordinary citizens alike.
Though we are puzzled by the persistent attacks on the exemption, a wide swath of legislators, financial officers and many others are marshaled to defend it. We are confident they will be successful and common sense will prevail.