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Proposals to cap or end municipal bond tax exemption would harm the economy and issu... Page 1 of 2
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<br /> Proposals to cap or end municipal bond tax exemption would
<br /> harm the economy and issuers, S&P warns
<br /> Proposals to eliminate or reduce three tax programs—the exemption of municipal bond interest, the
<br /> deductibility of property taxes, and the mortgage interest deduction "would have broad and mostly
<br /> negative consequences on the economy and on the credit quality of state and local governments and
<br /> other tax-exempt issuers," Standard & Poor's Ratings Services said in a new report. That "is
<br /> especially true of the exemption of municipal bond interest," S&P said in the report, "Cutting Popular
<br /> U.S. Tax Programs Could Harm Tax-Exempt Bond Issuers."
<br /> Policymakers "should consider the critical role these tax provisions play in the municipal finance
<br /> sector, the housing industry, and the overall economy," S&P said. The report said the three tax
<br /> provisions help grow the economy, make the tax code fairer, and effectively promote important policy
<br /> objectives three key criteria cited by Senate Finance Committee Chairman Max Baucus, D-Mont.,
<br /> and Ranking Member Orrin Hatch, R-Utah, in a letter asking their colleagues to help identify tax
<br /> expenditures that should be retained.
<br /> Proposals to reduce or eliminate these provisions "would cause a significant disruption to the market
<br /> and increase the cost of borrowing for municipal entities," said Steven Murphy, senior managing
<br /> director and head of U.S. Public Finance at Standard & Poor's. "Investors can be expected to seek to
<br /> be compensated for a reduced tax benefit, leading to an increase in the cost of debt issuance. If the
<br /> change were retroactive, interest rates on outstanding variable-rate debt would escalate. Refinancings,
<br /> which continue to be an important fiscal tool, particularly as municipal entities try to recover,
<br /> replenish balances, and invest in infrastructure, would become much less viable, if viable at all," he
<br /> added.
<br /> Without the tax exemption for municipal bond interest, municipal borrowers "would face higher
<br /> interest rates with the inevitable result that many state and local governments would need to impose
<br /> higher taxes, do less capital investment, or some combination of both," the report said. Low-income
<br /> taxpayers could be hit disproportionately hard, since state and local tax structures tend to be less
<br /> progressive than federal taxes. "In our view, such an outcome would be at odds with any suggestion
<br /> that the tax exemption should end because it unfairly benefits the wealthy," the report said.
<br /> These effects "would come at a time when municipal entities continue to struggle to recover from the
<br /> Great Recession; when the real estate market is making a tenuous recovery; and when capital
<br /> investment needs are at an all-time high," S&P said. If the proposed changes to tax law were
<br /> retroactive, interest rates on outstanding variable-rate debt would escalate, the report said.
<br /> "Increased debt service costs would force issuers to make difficult choices between capital
<br /> investment, reserve maintenance, taxation and user fee levels, and key services," S&P said. "This,
<br /> again, would be at a point where infrastructure needs are significant and growing, as the impact of
<br /> projects deferred during the recession are combined with ongoing maintenance, upgrade and growth-
<br /> oriented projects." Municipal issuers who fail to maintain and invest sufficiently in new infrastructure
<br /> "undermine their economic competitiveness, attractiveness for commercial, residential and nonprofit
<br /> investment, and, most importantly, their potential for growth," the report said. The inability to address
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<br /> http://www.naylornetwork.com/app-ppw/articles/print-V2.asp?aid=230724 8/26/2013
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