The Obama administration and congressional leaders continue to consider eliminating the tax exempt status of municipal bonds as a method to reduce the deficit.

This week, Representatives Dutch Ruppersberger (D-MD) and Randy Hultgren (R-IL) announced plans to circulate a “Dear Colleague” letter in support of tax-exempt municipal bonds. The letter urges Congress to support municipal bonds and to oppose proposals that would cap or eliminate the deduction for municipal bond interest.  

The Big 7 wants to ensure all members of local and state governments are aware of the possibility of losing the tax-exempt status on municipal bonds, and are asking members of the Big 7 organizations to contact their Senators and Representatives and urge them to “oppose all efforts to cap or eliminate the tax-exempt status of municipal bonds.”  Members are asked to highlight one or more critical infrastructure projects that were funded by tax-exempt municipal bonds.

As tax reform discussions advance on Capitol Hill, some proposals that would impact the tax-exempt status of municipal bonds are:

• 2010 Simpson-Bowles Commission: Proposed elimination of all income tax expenditures; interest earned on state and local municipal bonds would be fully taxable for newly-issued tax exempt municipal bond.

• President’s FY2013 Budget Proposal: Proposed placing a 28 percent limit on the value of specified deductions or exclusions from AGI and all itemized deductions;  the limit would apply on interest earned for new and outstanding state and local tax exempt bonds.

• Senate FY2014 Budget Resolution: Suggested the possibility of a cap being placed on tax expenditures, which could include interest earned on municipal bonds.

• President’s FY2014 Budget Proposal: Reiterates 28 percent cap on the value of certain tax benefits, including interest earned on new and outstanding state and local tax exempt bonds.

Tax-exempt municipal bonds have been an essential finance tool for state and local governments since 1913. They remain a primary source of revenue for municipalities to improve roads, schools, and create economic growth. To lose the tax-exempt status on municipal bonds would place a great financial burden on many state and local governments that are already financially distressed.