Municipal Bond Interest Exemption at Risk in Fiscal Cliff Negotiations

The National League of Cities and LMC urge cities to encourage Minnesota’s members of Congress to maintain the exemption for municipal bond interest.
(Published Dec 19, 2012)

While various scenarios of what a “deal” might look like continue to circulate as the fiscal cliff deadline nears, there’s little certainty on what a final package will include or whether it will be a short-term deal, a long-term deal, or a package that includes the debt ceiling or tax reform.

National League of Cities Meets With Leaders in Washington, D.C.
Earlier this week, National League of Cities (NLC) President Marie Lopez Rogers, Mayor, Avondale, Ariz.; First Vice President Chris Coleman, Mayor of St. Paul; Immediate Past President Ted Ellis, Mayor, Bluffton, Ind., and NLC Federal Relations staff held meetings at the White House with President Obama and on Capitol Hill with top tax advisors for Speaker of the House John Boehner and House Minority Leader Nancy Pelosi, and with the tax reform specialist for Senate Majority Whip Dick Durbin.

Based on these discussions, NLC staff believe that the fiscal cliff negotiations continue to include possible modifications to the current tax exemption for interest on municipal bonds. Therefore, it is crucial that cities contact their federal House and Senate members to help safeguard this essential financing tool for local governments.

Municipal Bond Interest and Minnesota Cities
Interest earned on municipal bonds has been tax-exempt since 1913, and their tax-exempt status allows municipalities to offer bonds at lower interest rates to investors, saving millions of dollars in borrowing costs that would otherwise be paid by local taxpayers. If the tax-exempt status is limited or eliminated, interest rates on future municipal bond sales will have to increase to attract investors.

While such a move may increase tax revenue to the federal level, it will shift the financial burden onto local governments and their taxpayers at a time when both are struggling to recover from the recession. Local taxpayers cannot afford to bear additional burdens imposed by the attempts to balance the federal budget.

Furthermore, municipal bonds are used to fund public infrastructure projects that create construction jobs in Minnesota. Increased borrowing costs may cause cities to delay projects or to scale back the scope of planned projects, which will have corresponding negative impacts on economic activity, including job creation as more of project costs are required for bond interest expenses.

Contact Your Congressional Representatives
NLC has created an online resource center on its website that includes sample op-eds columns, letters, resolutions, and articles on this subject. NLC encourages you to adapt or repurpose these resources for city’s efforts.

If you do take action, please let LMC know by sending an e-mail to Liasion@lmc.org. Then the League can forward examples to the National League of Cities to use in efforts in Washington, D.C.

The League of Minnesota Cities sent a letter to members of the Minnesota congressional delegation on this issue early this week. The League encourages cities to contact their congressional delegation on this issue and tell them about the local impacts it would have.

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