* Port City Daily…

A 51-page memo leaked from the House Ways and Means Committee identifies different programs — many categorized under health, welfare or energy — that could be modified or eliminated to reduce federal spending. One of these is federal tax exemption for state and local bonds. […]

[The exemption] works like this: A municipality’s governing body votes to pay for a major infrastructure project — schools, bridges, water-treatment facilities — through bonds. Sometimes, such as the case with most general obligation bonds, these must be approved by voters via bond referendum.

The municipality agrees to pay back the bonded amount with interest, but because that interest is tax-exempt for local governments, governing bodies can often secure a lower interest rate, making it easier for the municipality to pay off the debt.

If the tax exemption were removed, it could lead to higher borrowing costs for infrastructure projects. It would then be passed onto the taxpayer and reduce the availability of capital for local governments.

* Scott Sowers for the Bond Buyer…

“It’s a misconception that tax-exempt bonds protect the wealthy,” said Vikram Rai, lead strategist at the municipal division at Wells Fargo. “About 75% are held by retail, meaning moms and pops.”

“If you tell them that suddenly your bonds are taxable, it’ll destroy the wealth of a $4 trillion market by about 33%. Talk about burning down the house to cook a steak. This is what’s happening.” […]

Some believe the tax exemption will be kept in place for outstanding bonds to avoid burning down the house, but Rai believes the perceived savings numbers currently being discussed are all inclusive. […]

“What if the state of Michigan had to issue all of their debt taxable?” [said Emily Brock, director of the federal liaison center of the Government Finance Officers Association]. “We found that the difference between taxable and tax exempt was about 2.1%. You layer that 2.1% onto $4 trillion and that ends up being an $824 billion price tag.”

* In February, the University of Chicago Harris School of Public Policy broke down tax-exempt municipal bonds by state…

In return for investing in public infrastructure, investors receive favorable tax treatment on the interest they earn from municipal bonds. According to one recent analysis, this tax advantage reduces borrowing costs for state and local governments by an average of 54%, compared to taxable debt.

For Illinois that means…

• Since 2015, state and local governments in Illinois have invested $137.4 billion in projects financed by tax-exempt municipal bonds.
• Illinois taxpayers saved an estimated $2.9 billion on projects financed with tax-exempt municipal bonds since 2015.
• A total of 1,464 state and local governments have tax-exempt municipal bonds outstanding today. Of them, 1,203 have borrowed less than $30 million in the past decade. These smaller, less frequent borrowers are 82.2% of Illinois’s total borrowers.

* Caitlin Devitt for the Bond Buyer…

When municipal bond dealers gathered in Chicago last week, speculation around threats to the tax exemption emanating from Washington, D.C. dominated the conversation. […]

“I think there will be a huge amount of pressure on doing something on municipal bonds,” said Chuck Samuels, a member at Mintz and counsel to the National Association of Health & Educational Facilities Finance Authorities. “If you argue it abstractly it’s a no-win. It’s the local impact that matters,” Samuels said. Senate Finance Committee Chair Sen. Mike Crapo, R-Idaho, “knows every hospital in that state,” he noted.

Like others, Samuels said he sees PABs and the health care and higher education sectors as among the most vulnerable. […]

“There’s a very concerted effort to educate lawmakers on the importance of the tax-exemption,” said Paul Chatalas, Illinois’ director of capital markets and vice chair of the GFOA’s debt committee.

Chatalas warned of the pressure that would be put on states and locals if the exemption is eliminated. “It will be a de facto tax increase for every tax-exempt issuer in the United States, or else you issue less and then less infrastructure gets funded,” he said.

* Related…

* Bond Buyer | BDA hires communications firm to get the word heard on tax exemption: “The firm has Capitol Hill experience and we’re retaining them to enhance our advocacy,” said Mike Nicholas, BDA’s CEO. “We haven’t used a strategic communications firm in a very long time,” Nicholas added. “They’re going to help us get our message out there more effectively about the importance of the tax exemption and especially about the impact on smaller issuer communities” if the exemption were to be terminated.