Municipal Bonds

By Michael A. Fletcher
Published: July 9, 2013

Federal policymakers looking for ways to raise revenue while reforming policies that they see as subsidizing the affluent are eyeing proposals to limit the tax exemption for interest paid by municipal bonds.

But the proposals, like similar ones to limit tax deductions for mortgage interest and charitable donations, are running into determined opposition from those who say the policies — which have the backing of the Obama administration — would have unintended consequences.

In the case of the municipal bond deductions, advocates for local governments say limiting tax deductions on bond interest would hurt struggling state and local governments while hindering economic growth.

A recent study sponsored jointly by the U.S. Conference of Mayors and the National League of Cities said the reduction or elimination of the tax deduction would raise the financing cost of badly needed infrastructure projects. That, in turn, would reduce the number of projects, putting a damper on job growth.

The mayors’ study estimated that if the tax deduction had been capped at 28 percent in 2012, it would have reduced economic activity in the nation’s cities by nearly $25 billion.

“Changing the tax-exempt status of municipal bonds is simply a bad idea,” said Philadelphia Mayor Michael Nutter, past president of the U.S. Conference of Mayors. “If the goal is to help cities recover from the economic downturn and spur job growth, then this just doesn’t make sense.”

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