Municipal bonds have been the principal engine for building and modernizing America’s infrastructure for more than 150 years. They have supported the development of roads, bridges, airports, water systems, schools, hospitals, public transportation and energy grid upgrades across the country. So why are some suggesting that Congress should end their tax-exempt status and make them harder to use?
That’s the question on the minds of a growing chorus of experts, local officials and at least one group of powerful House leaders. They are warning Congress that removing the tax-exempt status of municipal bonds would set back local communities and big cities alike, forcing tough choices, rising prices and stalling both investments and growth.
House Financial Services Committee Chairman French Hill, together with six of the panel’s most senior members, recently wrote that measures to undermine the municipal bonds could have “unintended consequences … for thousands of local governments and the constituents they serve.” They went on to note that these bonds are lifelines in local communities, and that eliminating or reducing the municipal bond exemption would disproportionately harm “smaller and rural issuers.”
That’s why local leaders are now speaking out. Given their limited budgets and smaller tax bases, these communities have few alternative tools to raise the large amounts of capital needed for infrastructure investment.
And yet, in the search for offsets in the coming tax bill now being considered in Congress, some Republicans, including Stephen Moore, an informal economic adviser to President Trump, have proposed eliminating or rolling back the tax exemption on municipal bonds. And the proposal even showed up on a list of potential pay-fors released by the House Budget Committee in January.
This would be an existential threat to the municipal bond market and to the financial stability of many cities and towns, as well as countless retirees, pension plans and other investors. As the Wall Street Journal recently reported, even President Trump would be hit given the extensive municipal bond holdings in his own investment portfolio.
Local leaders are taking this threat seriously. The National Association of Counties has urged Congress to oppose any legislation that would eliminate or limit tax-exempt municipal bonds, calling them "a critical tool.” The U.S. Conference of Mayors has similarly stated that it “oppose[s] any effort to restrict this time-honored mechanism for raising local revenues to support locally driven projects.” And the head of the Ohio Mayors Alliance further warned that eliminating the exemption “would have a devastating impact on local governments’ ability to invest in critical infrastructure.”
Estimates from the Government Finance Officers Association show that eliminating the tax exemption would raise borrowing costs by $824 billion nationwide, a cost that would be passed on to taxpayers and lead to a $6,555 tax increase for every American household over the next decade. It would also directly harm many small businesses throughout the country who support infrastructure development and benefit from the improvement of our infrastructure – including the transportation network that serves as the backbone of the U.S. supply chain.
Importantly, the municipal bond tax exemption also helps ensure that decisions about when and where to invest in infrastructure are pushed down to the state and local level, where policymakers know best what is needed for their communities. It gives them the autonomy and policy freedom to fund projects without relying on the federal government. Paring back the exemption hampers this local control.
There are few financial products with a stronger track record of success than municipal bonds. Roughly 75% of our nation’s infrastructure is financed by municipal bonds – and they have funded more than $2 trillion in infrastructure investments over the last ten years. Removing this tool at a time when experts continue to give portions of America’s infrastructure a near-failing grade is also a dangerous prospect.
The municipal bond exemption saves taxpayers money, encourages job growth, sparks manufacturing and boosts investment in the U.S. Congress must preserve this key funding tool.
