Amidst all of the commentary, pro and con, on Representative Barney Frank’s career, scarcely anything has been said about his championship of a federal tax law policy that benefits all Massachusetts taxpayers – the tax exemption of municipal bonds.
While the merits of the Dodd-Frank Act continue to be debated, few would dispute that as chairman of the House Financial Services Committee, Frank steadfastly focused on the ability of state and local governments to access credit on reasonable terms and the importance of assuring that municipal securities markets continued to function throughout the crisis.
But the legacy of tax-exempt municipal bonds – a boon to taxpayers in all 50 states because it allows issuers to finance public infrastructure projects more affordably than if the bonds were subject to federal tax – is under an unprecedented threat. For the first time since enactment of the Internal Revenue Code in 1913, policymakers on both sides are questioning the ongoing viability of this exemption. Some are even characterizing the tax exemption of municipal bonds as a loophole that should be jettisoned along with other loopholes that exist under federal tax law.
To an extent, this is understandable. The financial crisis has made us all acutely aware of the pressing need to close the gap between federal revenues and expenditures. One way to do that is to raise revenues by abolishing loopholes in the tax system.
But to treat the exemption for municipal bonds as just another loophole in the debate would be a costly mistake, one that threatens to undercut the robust infrastructure investments that power our economy.
The municipal bond tax exemption has been around as long as there has been an Internal Revenue Code. Most municipal bonds are issued to fund capital projects, including schools, hospitals, roads, bridges, airports, courthouses, jails, waste disposal facilities and manufacturing plants.
The exemption permits state and local governments to issue these bonds at substantially lower interest rates: Studies indicate that average interest rate savings on tax-exempt bonds range from 15 percent to 30 percent compared to taxable bonds.
The result is that taxpayers – you and I – are saving tens of billions of dollars annually on our public infrastructure investments. Moreover, the municipal securities markets are directly accessible to bond issuers, meaning control over borrowing and development stays at the local level.
These are not trivial considerations. An outright repeal of the municipal bond tax exemption would dramatically diminish investments in infrastructure, with attendant reductions in jobs and economic growth. Even a partial reduction in the reach of the exemption, as in the recent American Jobs Act of 2011 and Debt Reduction Act of 2011 proposals, would tend to produce the same results, though perhaps with less dramatic results.
We should also ask ourselves about the suitability of legislative proposals that would substitute a “better mousetrap” in lieu of municipal bond tax exemption. These proposals, including so-called tax credit bond vehicles, national or super-regional infrastructure bond banks and outright block grants to local governments, are often touted as more efficient ways to deliver federal dollars to projects.
These arguments might or might not prove correct, but the benchmark for assessing them should be the outstanding track record of today’s municipal bond market. At a minimum, state and local bond issuers will want to know that the value of these substitutes is at least as great, and as reliable, as the subsidy they have already been deriving for a hundred years.
More than anything, we should resist the tendency to look at this exemption as just another loophole. We should recognize, as Representative Frank has, that this exemption has delivered real benefits for Massachusetts taxpayers.
We should be ready to engage in a thoughtful debate about its value before we casually consign it with all of the other loopholes to the ash-heap of history.
Antonio D. Martini
Partner, Edwards Wildman Palmer; Boston
Treasurer, National Association of Bond Lawyers; Washington, D.C.
