State Government Coalition: Eliminating Tax-Free Muni Bonds Would Have "Chilling Effect" on Economy

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