5.7. ERMUSR 03-13-2013 - Laserfiche WebLink

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"'Minnesota Municipal Utilities Association suggested eliminating the exemption altogether, violate the implicit and reasonable expectation of and Republicans and Democrats on both sides of investors that Congress will not change the terms Capitol Hill have offered proposals to curb the governing the taxability of interest for bonds exclusion of municipal bond interest. already outstanding. In the nearly 100-year history of the tax exemption, Congress has never applied a The President's Budget Proposal retroactive tax to bonds already held by investors. In his FY2013 Budget, (FY2014 has been delayed) Again, this new tax risk will result in higher the president proposed a cap on the value of borrowing costs for states and local governments. certain tax deductions and tax exclusions, It is estimated that state and local borrowing including interest on bonds issued by state and rates could rise by as much as a full percentage local governments, that is intended to limit tax point if the proposal is enacted. State and local benefits for certain higher income taxpayers to the governments will have to pay these additional costs equivalent of the 28% tax rate. Under this proposal, on every bond they issue, even though the tax is investors with adjusted gross incomes exceeding intended to affect those considered "wealthy." the thresholds set by the president's proposal would no longer be able to receive the full benefit MMUA Position of the tax-exempt interest they paid for when they While we support the greater goal of deficit purchased the bonds. This could amount to an reduction, Congress must reject any proposal that effective 7-percent tax on otherwise tax-exempt would eliminate or limit the income tax exemption interest for many taxpayers who would be in the on state and local bonds. Retaining the federal tax 35% tax bracket. exemption on municipal debt is a critical element with respect to the fiscal health of state and local In the case of newly issued tax-exempt bonds, governments and the ability to rebuild the nation's investors would likely demand higher interest infrastructure to compete in the 21st Century. rates to make up for this new tax. Such a proposal would have a direct and negative impact on state and local governments and authorities, and more importantly, the communities they serve. The outcome would be higher borrowing costs y P 'i�j 4•„ for state and local governments, less investment d "ji k-21( � - �' 11)411" g am., li pii 3 t , f. ��;��n - 1111". in infrastructure, and fewer jobs. This comes '�J�tgpl! Ili �y } E� �„ at exactly the wrong time as state and local s�n�� q�,'J " gj �� j 1 i �' • government finances remain under pressure, l ;a y ,s i -' 'e" �. and infrastructure and education investment is ri E woefully inadequate. -1 F To make matters worse, the president's proposal would be retroactive and would apply to interest J on bonds governments have already issued �{ and investors have already purchased with the understanding that they would be tax-exempt. 111`0 'y. - The effect would be to substantially erode the �a ,A IY i... value of bonds in investors' portfolios. This would 2013 Federal Position Statements/5