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taxable bonds,the spread is closer to 180 basis points.The • Replacing the exclusion for municipal bonds with a direct difference can save municipal bond issuers 25 percent over the payment bond would increase borrowing costs by 16 percent 30-year life of a project.These savings result in more critical (assuming a direct payment percentage of 25 percent of investments in infrastructure and essential services by state and the issuer's interest expenses).Direct payment bond issuers local governments and lower costs for the services they provide. would also be vulnerable to the annual budget process,as evi- Also,municipal bonds are ideally suited to finance capital-inten- dented by the ongoing sequestration order for Build America sive and long-lived public infrastructure,such as the assets of a Bond payments. (See APPA's fact sheet,"Sequestration for public power utility. Build America Bonds'Credit Payments"for additional infor- Investors purchase municipal bonds in part because of tax mation.) considerations,accepting a lower rate of return because the To put these numbers in perspective,a$250 million power interest is exempt from federal income tax.Municipal bonds plant would cost$80 million more to finance if the tax exemp- are also valued for their ability to generate a steady stream of tion for municipal bonds were repealed;$40 million more if the revenue for fixed-income households.Individual households tax exemption were"capped"and$30 million more if municipal are the investors in over 70 percent of municipal bonds.Nearly bonds were replaced with direct payment bonds. 60 percent of this household tax-exempt interest is earned by taxpayers over 65 years old.In 2012,48 percent of all municipal bond interest paid to individuals went to those with incomes of less than$250,000.2 American Public Power Association Position The Association believes municipal bonds are the single most Recent market performance and the"flight to quality" un- derscore that municipal bonds are also valued as stable financial effective tool for financing investments in public infrastruc- investments.Now more than 200-years old,the U.S.municipal ture.Taxing municipal bonds would impose higher borrowing costs that would limit investment in critical infrastructure and, bond market is well-established,with a robust and compre- hensive federal legislative and regulatory system that protects ultimately,impose higher electric rates on our residential and investors.Likewise,municipal bonds themselves are typically business customers. In sum,any such change would simply extremely secure investment vehicles:the default rate for invest- shift costs from the federal government onto the backs of state and local residents.As a result,the Association believes that the ment grade municipal bonds is far less than 0.1 percent,a frac federal tax exclusion for municipal bond interest should not be tion of the default rate for comparably rated corporate bonds. limited or replaced. Congressional and Administration Actions— American Public Power Association Contact Threats to Municipal Bonds Calls to tax municipal bonds to pay for federal income tax rate John Godfrey,Senior Government Relations Director, cuts or deficit reduction are on the rise.All would have the 202-467-2929/jgodfrey@publicpower.org same effect:limiting or eliminating the income tax exemption for interest from municipal bonds would reduce investments in vital infrastructure across the country and increase the cost of The American Public Power Association is the voice of electricity for public power customers.Ultimately,a dispropor- not-for-profit,community-owned utilities that power tionate share of this burden will be shouldered by those who can 2,000 towns and cities nationwide.We represent pub- least afford it. lit power before the federal government to protect the For example: interests of the more than 49 million people that public • A repeal of the tax exemption for municipal bonds would power utilities serve,and the 93,000 people they em- increase borrowing costs by 47 percent; ploy. Our association advocates and advises on electricity policy,technology,trends,training,and operations.Our • A surtax on municipal bond interest to create a"cap"on the members strengthen their communities by providing tax value of the exclusion for municipal bonds would increase superior service,engaging citizens,and instilling pride in borrowing costs by 32 to 35 percent;and communityowned power. z Internal Revenue Service,"Statistics of Income-2010:Individual Income Tax Returns"(2012). 62 PublicPower.org 244