“Neither of these are attractive options,” he said.
Tax-exempt municipal bonds benefit states and localities in the following ways:
· Local decision-making — States, counties, municipalities and school districts can build projects based on local priorities and needs assessments.
· Responsible financing — States, counties, municipalities and school districts can borrow responsibly for capital projects. Bond issuance has remained stable relative to GDP for the past 10 years.
· Private capital — Bonds bring private capital to public projects. In an age of constrained federal and state budgets, this is essential.
More than 60 percent of bonds are owned by individuals, either directly or through mutual funds. To continue drawing this private investment, states and localities need tax-exempt bonds.
· Effective System — The tax-exempt bond market has worked effectively for decades. It’s not a loophole— the tax exemption was considered a fundamental right of states when the country adopted the 16th Amendment which allowed federal income taxes, and the principle that the income should be exempt was enshrined in the very first tax federal income tax code in 1913.
· Reciprocity — While the federal government provides a tax exemption on state and local bond interest, the states likewise do not tax the interest on federal bonds.
“As the debate continues on how to best avoid the fiscal cliff, Washington politicians should understand that any attempt to reduce or eliminate the tax exemption on state and local infrastructure financing would have serious repercussions,” Miller said.