Your Say: Municipal Bond Tax Exemption is Worth Saving

Special to The TelegraphNovember 25, 2012 

Thanks to tax-exempt financing and the tax favored status it enjoys, Macon boasts a burgeoning downtown with a particular emphasis on the Second Street corridor. Thanks to tax-exempt financing,

Mercer University has built a new football stadium. Bibb County Schools, Bibb County, and Macon State College also are beneficiaries of the nation’s system of tax-exempt finance.

In fact, tax-exempt financing for governments has helped build schools, roads, bridges, water and sewer systems, libraries and airports for more than a century.

However, in response to the looming congressional “fiscal cliff,” several proposals have emerged in Washington D.C. involving the curtailing or wholesale elimination of the tax exemption of municipal bond interest. Aimed at “wealthy investors,” these proposals have apparently gained political favor, despite the fact that curtailing or eliminating the tax exemption of municipal bond interest will have no actual effect on wealthy investors. Rather, the only real effect of curtailing or eliminating the tax exemption of municipal bond interest will be that state and local government entities (such as public schools systems, cities, counties, and hospital systems) will pay more in interest when they go to build new schools, parks, and hospitals. The result will be that those governmental entities will have to either build lower cost facilities or reduce services in other areas in order to be able to afford the cost of those same infrastructure projects.

With that introduction in mind, here’s a bit of background. The exemption from federal taxation of municipal bond interest was first recognized in 1913 when the first federal income tax was imposed. In other words, the exemption of municipal bonds interest from federal income taxation is no loophole; rather, it has been one of the few consistently treated income tax components -- and it has consistently been treated as an exempt item. Now, after almost 100 years of consistent treatment, federal lawmakers want to curtail -- or even eliminate -- the exemption of municipal bond interest from federal income taxation because those same lawmakers have been unable to get their own financial house in order.

Most Americans are now aware that unless Congress acts quickly, the federal government is headed for a fiscal cliff. The fiscal cliff is a result of multiple Congressional failures to stop spending too much money, which has in turn maxed out Congress’ debt limit (aka its credit card). If Congress doesn’t address the fiscal cliff problem quickly, all the Bush-era tax cuts will expire, the Obama-era payroll tax cuts will expire, and massive across-the board cuts will take place affecting national defense and social services. Regardless of political affiliation, no one wants to see these cuts enacted because of the negative impact that groups like the Congressional Budget Office have forecast will ensue.

So, one of the “easy” fixes proposed by different Washington D.C. groups is the elimination or reduction of the tax exempt treatment of municipal bond interest. Any proposal to eliminate the tax exempt treatment of municipal bond interest will have meaningfully negative effects. To illustrate the most obvious effect is to use a hypothetical $50 million dollar city project financed with bonds. If the tax exemption of municipal bond interest was eliminated, that project would cost an additional $8,000,000 in interest alone. That $8,000,000 in additional cost would mean that either the city must construct a smaller facility, or do fewer overall projects, which would likely mean certain projects simply aren’t done, or the city must pass the additional cost of constructing the facility onto taxpayers in the form of higher taxes. Either result is bad for residents that live in that city.

Furthermore, even though it is politically popular right now to claim that tax exempt bonds are a benefit for the wealthy only, domestic middle-class households are the largest category of municipal bond investors, and retail investors as a whole own approximately 70 percent of all outstanding domestic municipal bonds. And, think how a middle-class household is going to react when they can no longer buy tax free municipal bonds because Congress spent too much on its credit card. Furthermore, consider how that family is going to feel when the value of the tax free bonds they currently own plummets if the tax exemption is eliminated or simply curtailed.

The bottom line is simple -- eliminating or curtailing the tax exemption of municipal bond interest will force local governments, state governments, and nonprofits to pay higher costs that will be passed right along to their residents, customers, and patients. It’s nothing more than the federal government passing and shifting the burden of its financial errors down to local and state governments and nonprofit entities that are already faced with reduced federal government funding. Tax exempt financing is essential for repairing, expanding and building the infrastructure our economy needs, and it should be saved.

Blake C. Sharpton is a partner in the Macon office of Peck Shaffer & Williams LLP, a public finance law firm.

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