Sullivan: Tax changes could hurt municipal bonds
BY DANIEL S. SULLIVAN
Wednesday, March 13, 2013
3/13/13 at 3:04 AM
The battle that took place over the "fiscal cliff" foreshadowed the current fights that Congress and the president are having over taxes and spending as Congress bumped up against the March deadlines on raising the debt limit, funding the government and automatic spending cuts that were delayed as part of the fiscal cliff deal.
Congress will likely consider sweeping changes to the federal income tax system either as part of this round of budget talks or in the context of comprehensive tax reform. These changes could include a revision to the current federal tax treatment of interest paid on municipal bonds.
Municipal bonds are a tried-and-true financing vehicle for state and local governments to meet citizens' needs. Oftentimes, it's the only tool they have to access capital to build critical projects such as roads, bridges, schools, hospitals, housing and electricity and water infrastructure.
According to the Congressional Budget Office, three-quarters of total U.S. investment in infrastructure is financed with municipal bonds. Altering or limiting the current federal tax exemption for municipal bond interest would hinder these investments and result in less infrastructure and higher costs to states and localities already under stress.
Since the enactment of the federal income tax code in 1913, interest paid on municipal bonds has been exempt from federal tax. Because of this, investors accept a lower rate of return. Historically, the yield on a tax-exempt municipal bond has been nearly 150 basis points lower than on a comparable taxable bond. This can reduce a project's costs by as much as 20 percent over the 30-year life of a bond.
Capping the tax exemption will push investors away from the municipal bond market unless a higher interest rate is offered to make up for the effect of the new tax rules. The net result would be to increase borrowing costs for essential infrastructure. The municipal bond market is stable and secure, providing issuers access to capital for needed investments, while providing investors a trusted asset producing a steady return on investments that build America and create jobs.
For example, public power systems like the Grand River Dam Authority have limited means to raise funds for our communities' capital needs. Since we are nonprofit entities, we do not sell stock and so are permitted to raise capital by issuing municipal bonds. These bonds made our current electrical generation facilities a reality more than 30 years ago.
Without tax-exempt financing this would not have been possible. Given the capital-intensive nature and long life of public infrastructure, such as the assets of a publicly owned electric utility, tax-exempt debt is essential to maximizing investments and providing our customers with reliable, affordable power. GRDA power touches 75 of 77 Oklahoma counties and there are GRDA municipal bondholders in 76 of 77 Oklahoma counties. The investment in GRDA municipal bonds equals $272 million by Oklahomans. The decision being discussed in Congress impacts investments in Oklahoma as well as electricity costs.
As Congress considers tax reform, hundreds of communities will be making critical decisions about financing improvements to aging infrastructure on which so many citizens depend. In the wake of a disaster, such as superstorm Sandy or 9/11, Congress often looks to the municipal bond market to provide access to capital that helps rebuild these communities.
While Washington, D.C., looks for a long-term strategy to cut spending and reduce the deficit, it should consider the impact that tax changes on municipal bonds would have on investment in infrastructure. While intended to limit the benefit of the interest exemption for higher-income taxpayers, proposals to cap the tax exemption would actually increase the cost of infrastructure investments by state and local governments and other municipal entities, including publicly owned electric utilities.
Washington should be strengthening - not weakening - the municipal bond: an essential, reliable, and effective tool for financing our nation's infrastructure needs.
Original Print Headline: Tax changes could hurt municipal bonds
Daniel S. Sullivan is the Grand River Dam Authority CEO and director of investments.
Daniel S. Sullivan: Washington should be strengthening - not weakening - the municipal bond: an essential, reliable, and effective tool.