Since the federal income tax was instituted in 1913, interest earned from municipal bonds issued by state and local governments have been exempt from federal taxation. These bonds are the primary financing mechanism for state and local infrastructure projects, with three-quarters of the infrastructure projects in the U.S. built by state and local governments, and with over $3.7 trillion in outstanding tax-exempt bonds, issued by 30,000 separate government units. Local governments save an average of 25 to 30 percent on interest costs with tax-exempt municipal bonds as compared to taxable bonds. This is true because investors are willing to accept lower interest on tax-exempt bonds in conjunction with the tax benefit. If the federal income tax exemption is eliminated or limited, states and localities will pay more to finance projects, leading to less infrastructure investment, fewer jobs, and greater burdens on citizens who will have to pay higher taxes and fees.
As the Administration and Congress look for revenue to reduce the deficit and fund programs, the federal income tax exemption provided to interest paid on state and municipal bonds (debt) is under threat. In addition to increasing taxes, the federal government can raise revenue by expanding what is subject to being taxed (broadening the base); as an alternative to raising taxes, interest paid on bonds issued by local governments currently not taxed could lose their exemption from taxation.
The need for infrastructure investment-and the jobs that come with it-is acute. The American Society of Civil Engineers estimates that the nation should spend $3.6 trillion by 2020 on infrastructure projects. Much of this need must be met by states, counties, and cities with municipal bonds being the primary tool for doing so.
Legislative Priority: Protect Municipal Bonds
Issue brief containing NLC's legislative position on Municipal Bonds, and key messages to Congress and the Administration.
Municipal Bonds for America Coalition
NLC serves on the executive committee of this coalition, which is a non-partisan group of municipal bond issuers, state and local government officials and municipal market professionals providing education on the benefits of the traditional municipal bond market.