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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…
posted by Isabel Miller
Wednesday, Mar 12, 25 @ 12:29 pm
Previous Post: Treasurer Frerichs’ home targeted again by late-night protesters
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IF they’re looking at S&L government tax exempt bonds, this “proposal” is part of a larger effort that is a desperate replay of Stockman / Filan trying to find every loose piece of change under couch cushions.
Comment by Anyone Remember Wednesday, Mar 12, 25 @ 12:42 pm
Privatize it all.. that’s the end goal
Comment by PoliticsD Wednesday, Mar 12, 25 @ 12:54 pm
I think getting rid of tax-free munis is a great idea. How many fewer football stadiums would have been built off the backs of the taxpayers ? This would be a great institutional check on state and local government. California’s high speed train to nowhere might never have gotten off the ground.
Comment by Steve Wednesday, Mar 12, 25 @ 1:15 pm
=This would be a great institutional check on state and local government.=
There is a high probability that it would increase your property taxes given the cost of borrowing for local government would increase. For schools, most of that borrowing is voter approved when it comes to tax free bonds.
Just something to consider.
Comment by JS Mill Wednesday, Mar 12, 25 @ 1:45 pm
== How many fewer football stadiums would have been built ==
And how many few dilapidated schools would be repaired? And how many crumbling bridges would be rebuilt? And how much affordable senior housing would be developed? And…and…and…
Congress talked about doing this 40 years ago. It didn’t make any more sense then than it does now because increased borrowing costs get passed on to the public. The only people who will benefit are institutional lenders who will collect the interest.
Comment by Southside Markie Wednesday, Mar 12, 25 @ 2:42 pm
Very similar to Governor Pritzker’s “Elimination ” of illinois Grocery tax….Federal Government following his lead….let the locals decide how to cover the cost…
Comment by Tax And Spend Wednesday, Mar 12, 25 @ 3:27 pm
The added costs will reduce work done by local government. Large updates to water systems, updates to schools, libraries, etc. Maybe hey reduce the project to keep costs down and or we all pay more for the same amount of work. The only true entity that comes out ahead is the federal government. More tax money flows in to the Fed due to interest earned. The firms that buy these bonds, it’s a wash. They get more interest, but they pay taxes on that interest. THe market that day decides the rates paid. This is simply to bring in more revenue to cover costs elsewhere in the government, or reduction in taxes elsewhere. The 2017 tax law that lowered tax rate for those over $500k removed some of the refinancing of these issues on a tax exempt basis. It raised revenue to lower it for other people. Just like the cap on donation to tax exmpt organizations help raise taxes on people under $500k who give donations to church and other non-profit groups.
Comment by frustrated GOP Wednesday, Mar 12, 25 @ 3:27 pm