By Toby Eckert
03/01/2016 12:10 PM EDT
A coalition of state and local officials today urged congressional tax writers not to tamper with the tax exemption for municipal bonds.
Eliminating or capping the exemption would drive up the cost of infrastructure projects nationwide and result in fewer projects, the more than 600 officials said in a letter to the chairmen and ranking members of the House Ways and Means and Senate Finance committees.
“If the tax-exemption is capped or eliminated investors will demand a higher interest rate on municipal bonds thereby increasing the cost to municipal issuers,” said the letter, organized by the National Association of State Treasurers. “As a result, municipalities will have to either curtail infrastructure projects or raise taxes on sales, property or income.”
“Additionally, if changes to the tax treatment of these bonds are enacted, a tax risk premium will be built into interest rates demanded by future investors.”
The letter was spurred by the continuing discussion of tax reform on Capitol Hill and proposals by President Barack Obama to cap the tax exemption. When Obama and congressional leaders considered capping the exemption during the 2012 “fiscal cliff” negotiations, investors withdrew $2.3 billion from municipal bond mutual funds, the officials noted.
“If issuing affordable debt is no longer an option and unfunded projects begin to further mount, state and local governments will have to seek additional infrastructure support at the federal level through federal highway legislation and other sources,” they wrote.
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