Municipal bonds finance three-quarters of all infrastructure investment in the U.S.: the building of schools, drinking water facilities, hospitals, roads, bridges, as well as energy generation, transmission and distribution projects — the very infrastructure we depend on to maintain our quality of life and promote local commerce and job creation.
Municipal bonds help ensure that our customers have reliable access to clean drinking water, electricity for their homes and businesses, and other vital services necessary for a growing economy.
Since the creation of the federal income tax in 1913, interest on public-purpose municipal bonds has been excluded from federal income tax just as interest on U.S. Treasury bonds has been excluded from state and local taxes. Even as Congress and President Ronald Reagan enacted major tax reforms in the mid-1980s, the exemption for government-purpose bonds remained. This exclusion from federal taxation lowers the interest rate that lenders demand when our utilities, cities, counties or school districts borrow money to finance important local infrastructure.
But there’s a threat to this critical tool for financing infrastructure. The national commission on deficit reduction, “Simpson-Bowles,” recommended fully taxing the interest on newly issued municipal bonds. The president’s budget request sent to Congress this month goes further, proposing a surtax — described as a “cap” — on municipal bond interest for bonds already issued and those to be sold in the future.
We agree that balancing the federal budget and, with that, reforming the federal tax code are important issues that need to be addressed. However, taxing municipal bonds, wholly or through a “cap” or a “limit,” would increase borrowing costs for all public entities, costs that will either need to be passed on to our customers and local residents in higher rates or local taxes or, worse yet, force utilities and local governments to reduce their investment in critical infrastructure projects.
We are thankful that Congress has maintained current policy on tax-exempt municipal bonds. With these proposals still alive, we intend to continue informing federal policymakers of the negative impacts that come with ending current municipal bond policy.
Based on current projections for just our three public utilities, the impact would be a $120 million increase in our customers’ rates over the next 10 years if we were to lose access to tax-exempt municipal bonds. Because we spread our costs uniformly over all customers, this would amount to a regressive “flat” tax on all our customers. As our local economy recovers, our customers should not be saddled with this type of regressive tax or additional limitations on our ability to build vital facilities.
Together, we provide service to nearly 2 million residents in the Puget Sound region. They depend on us to invest in capital improvements to ensure they have access to reliable electricity and clean drinking water. Financed with municipal bonds, these projects provide hundreds of good-paying, family-wage jobs and ensure that our economy is poised for growth in the future.
Municipal bonds are the foundation of local infrastructure investment around the country. As our economy continues to recover, we urge Congress to allow local public utilities to continue using municipal bonds as an important financing tool to make critical investments that serve the needs of the American people.