A coalition representing state and local governments is urging the president and the Speaker of the House to keep the federal government income tax exclusion for municipal bond interest as leaders negotiate an alternative to the upcoming fiscal cliff cuts and tax hikes schedule to kick in next month.

In a letter dated Thursday, the group warned President Barack Obama and House Speaker John Boehner that taxing the bond interest would burden governments and would “have a chilling effect on” the nation’s recovery.

“Taxing municipal bonds would immediately increase borrowing costs for state and local governments by as much as 2 percentage points, which translates into a 25 percent increase in infrastructure costs over time,” the letter, signed by 21 association heads and members of government, said. “This would cause a significant decrease in infrastructure spending by states and municipalities, further slow the economic and jobs recovery nationally, and cost taxpayers and ratepayers billions of dollars in higher interest costs each year.”

Boehner has said recently that he would consider nixing the tax break on the bonds for higher income households. Obama has touted a proposal that would put a cap on deductions for singles earning more than $200,000 and couples earning more than $250,000.

But those who issue bonds say any changes would increase their cost of borrowing money, making vital infrastructure projects more expensive. And those costs would trickle down to all tax payers – not just the wealthy.

The group in Thursday’s letter noted that while the federal government may miss out on an estimated $40 billion in tax revenue, that payment “leverages $400 billion in new infrastructure projects annually.”

“Making abrupt, fundamental changes to the current tax treatment of municipal bonds as part of year-end considerations would have far-reaching adverse and unintended consequences affecting jobs and infrastructure,” they said.

Who Signed the Letter?
 Dan Crippen, Executive Director 

National Governors Association

 Robert O’Neill, Executive Director 

International City/County Management Association

 Matthew D. Chase, Executive Director

National Association of Counties

 Donald J. Borut, Executive Director

National League of Cities

 Tom Cochran, CEO and Executive Director

U.S. Conference of Mayors 

 Jeffrey L. Esser, Executive Director/CEO

Government Finance Officers Association

 Robert (Kinney) M. Poynter, Executive Director

National Association of State Auditors, Comptrollers and Treasurers

 Kate Marshall, President

 National Association of State Treasurers & Nevada State Treasurer

Rick Pollack, Executive Vice President

American Hospital Association

 Bert Kalisch, President and CEO

American Public Gas Association

 Mark Crisson, President & CEO

American Public Power Association

 Peter B. King, Executive Director

American Public Works Association

 Rick Farrell, Executive Director

 Council of Infrastructure Financing Authorities 

 Vince Sampson, President

Education Finance Council

 Chuck Thompson, Executive Director

International Municipal Lawyers Association 

 Missy Mandell, Executive Director

Large Public Power Council

 Ken Kirk, Executive Director

National Association of Clean Water Agencies

 Pamela Lenane, President

National Association of Health and Education Facilities Finance Authorities

 John Murphy, Executive Director

 National Association of Local Housing Finance Agencies 

 Barbara Thompson, Executive Director

National Council of State Housing Agencies

 Thomas J. Gentzel, Executive Director

 National School Boards Association