Did you hear it?
We’re referring to the exhale by governors, mayors and countless government finance officers.
It was a collective sigh of relief that the deal avoiding the fiscal cliff left the tax exemption for municipal bonds intact.
For months, ideas were floated that would compromise the exemption, which for more than 100 years has helped build schools, hospitals and other essential public projects across the country. The Obama administration and others proposed ideas that would, one way or another, limit the tax break or eliminate it altogether.
Fortunately, Congress left it alone.
Some have argued that the exemption is merely a tax break for the affluent. And though munis have certainly served generations of investors, they’ve also played a key role in enhancing the affordability of building water treatment plants, sewage facilities, electrical plants, airports and numerous other long-term projects.
Simple math
Many of our myopic politicians are missing an important point: If the exemption were cut or eliminated, investors would demand higher interest rates, which in turn would increase borrowing costs and ultimately, be paid by every citizen in the form of higher electric rates, property taxes and assessments.
Municipal finance officials know that any additional tax revenue derived from compromising the exemption would flow to the federal government, while the burden of increased borrowing costs would be borne by municipal issuers and local taxpayers.
Ironically, these costs would most affect the middle-class, who the politicians claim they are working so hard to protect.
“Who will pay if the exemptions go away? You will. Your kids will. Your grandkids, too,” wrote Nancy Bui-Thompson, president of the Sacramento Municipal Utility District’s board of directors, in an editorial published by the Sacramento Bee just prior to the vote.
“If a community couldn’t bear the cost of raising rates and costs of services, needed projects would likely be deferred, further eroding our infrastructure. Broken things might stay broken longer, and new things might not get built. That’s not the recipe for a thriving society or economy,” she wrote, echoing finance officers across the country.
State and local groups remain vigilant
While munis were left untouched in this latest deal, there’s no guarantee the exemption won’t again come under fire as Congress still has other budget issues to address, so the considerable lobbying effort by state and local groups against tampering with the exemption will continue.
We believe leaders in Washington will eventually recognize the central role this vital financial mechanism has played in spurring our country’s historic growth and do the only sensible thing: leave it alone.