Tax Exempt Municipal Bonds

With the start of the 119th Congress, all eyes are one the tax reform debate and what it could potentially mean for state and local governments. There is no doubt that the bulk of the cost to provide the infrastructure supporting communities across the country is born at the state and local levels, and tax-exempt municipal bonds are the primary tool to make it happen. Click here for GFOA's welcome letter to Congress highlighting the importance of tax-exempt municipal bonds.

We remain concerned that the threat of elimination is still prevalent as the tax reform debate gets underway. If state and local governments lose the ability to use tax-exempt bonds and are compelled to issue taxable bonds as an alternative, the increased costs would have a crippling effect on infrastructure, community services, and households in general.

Communities across the country would be negatively impacted if federal tax policy reduced the financial power of state and local governments to meet their capital needs. This further exacerbates the current situation faced by state and local governments in continued reductions or elimination of federal assistance of various kinds over the years, including categorical grants and general revenue sharing, and seeing a rise in costs due to federal mandates (legislative or regulatory requirements imposed by the federal government upon states and localities). No federal program has or would be able to finance all the capital needs across the country. For over 100 years, the municipal bond market has worked fairly and efficiently to address these needs, whether it is in our largest states and cities or the rural areas across the United States.

Current State of Federal Infrastructure Policy

The Tax Cuts and Jobs Act (TCJA) passed by the 115th Congress and signed into law by the President in 2017 sets the stage for the tax reform debate in the 119th Congress. With several provisions expiring at the end of 2025, lawmakers face several choices on what should be included in the next bill. Keep in mind, the TCJA made several changes to the tax code of interest to governments. Although the TCJA did not alter the full tax exemption for municipal bond interest, other changes noteworthy to issuers of municipal bonds included:

• the elimination of advance refundings;
• the elimination of tax credit bond programs; and
• the reduction of the corporate tax rate and elimination of some corporate, bank and insurance tax incentives to purchase municipal securities.

Unfortunately, this means we enter the 2025 tax reform debate in an already difficult finance environment for many public issuers to address critical needs like developing or updating local infrastructure. Whether it is through program funding or policy changes, which could include adopting municipal bond modernization provisions, we NEED our federal partners to help us address these challenges. We have a proven track record of resilience but it takes all levels of government working together for the good of all our constituents.