WASHINGTON – The Bond Dealers of America is urging the Ways & Means Committee to preserve the tax exemption of municipal bonds, saying this is the "most effective financing method for our nation's critical infrastructure."
In a letter sent to Ways & Means Committee Chairman Rep. Kevin Brady, R-Texas, on Thursday, BDA's chief executive officer Mike Nicholas said limiting or eliminating tax-exemption for munis would increase infrastructure costs to state and local governments by 15% to 20%, which in turn could lead to less investment in infrastructure and a hike in taxes, utility rates and user fees.
The letter comes two days after the House task force on tax reform led by Brady released a mission statement that contained several principles, including limiting deductions, credits and exclusions in the tax code, one of which is tax-exempt bond interest. The task force said the principles should make "our broken tax code simpler and fairer."
"A key step in rebuilding our economy is providing cost-effective financing for our nation's infrastructure," Nicholas wrote. "Tax-exempt municipal bonds are the only proven mechanism to accomplish this task."
"As the committee continues its examination and deliberations on ways to reform our federal tax code, we strongly urge you to look beyond the words and calculations in the tax code to the real world implications,¬" he said.
Beyond the potential impact on state and local governments, Nicholas said imposing new taxes on munis would also adversely affect investors and lower their confidence in the market, leading to higher yields on bonds, forcing municipal governments to pay higher issuance costs and leaving less capital for infrastructure projects.
With nearly half of muni interest paid to households earning less than $250,000 annually, Nicholas also argued that capping the value of tax exemption would reduce the value of outstanding municipal bonds by about $200 billion. Most of the market erosion, he said, would fall on middle-income investors, including seniors over the age of 65, who own more than half of the current outstanding municipal bonds.
"None of these options is desirable to any state or local government…at a time when the country is seeking ways to jump-start the economy – an economy that places a heavy reliance on well-functioning, up-to-date infrastructure," Nicholas wrote.
The committee-led task force will hold idea forums over the coming months to further develop its tax reform plan.
