CITY ISSUES TEETERING ON THE EDGE OF THE FISCAL CLIFF

  • Municipal Bond Tax Exemption:  As Congress contemplates ways to keep from plunging off the “fiscal cliff” known as sequestration (the  across-the-board spending reductions in the federal budget that could take place  at the outset of 2013), the primary mechanism for financing the nation’s urban infrastructure could be on the chopping block.  For the last 100 years, the federal government has not taxed the interest earned by investors in bonds issued by municipal and other local governments.  These tax exempt bonds – used to fund local infrastructure projects such as roads, bridges, hospitals, affordable housing, and water treatment facilities – enable cities to pay lower interest rates when financing these projects.

    An analysis provided by the Government Finance Officers Association concludes that eliminating this tax exemption could increase borrowing costs by two percentage points.  With budgets being cut at every level of government in recent years, Texas keeps falling further behind in meeting the infrastructure needs of its fast-growing population.  Limiting the tax exemption on municipal bond interest could have unintended consequences for city taxpayers and would likely result in either: (1) higher taxes to support bond issues; and/or (2) reductions in needed capital improvements.

    City officials are encouraged to contact their congressional delegation and urge them to preserve the tax-exempt status of municipal bonds.  For more information, you can visit Municipal Bonds for America at http://www.munibondsforamerica.org/.

TML member cities may use the material herein for any purpose. No other person or entity may reproduce, duplicate, or distribute any part of this document without the written authorization of the Texas Municipal League.

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