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Local Governments Fear Plan to Tax Bond Interest Threatens Road Funding

Bill Clark/CQ Roll Call
Part of Camp’s tax overhaul proposal puts $126 billion derived from corporate tax changes toward improving roads, bridges and highways, while at the same time taxing the interest from municipal bonds that state and local governments use for such infrastructure projects.

House Ways and Means Chairman Dave Camp’s proposed tax overhaul got high marks last week from federal transportation leaders for committing to prop up the ailing Highway Trust Fund, but it is drawing criticism from state and local officials who depend on municipal bonds to finance infrastructure projects.

The Michigan Republican’s plan, which would dedicate $126 billion in new revenue from corporate tax changes to roads, bridges and transit systems, also would expose some municipal bond interest earnings to taxes.

Currently, interest paid on municipal bonds is generally exempt from federal taxes — an indirect subsidy by the federal government that makes the bonds more attractive to investors and reduces financing costs for state and local governments. Under Camp’s plan, a new 10 percent surtax on the very wealthy would apply to municipal bond interest along with other income.

Mike Nicholas, CEO of the Bond Dealers of America, said in a statement last week that subjecting municipal bond interest to the surtax would “negatively impact municipal bonds” by making them less attractive to wealthy investors.

“Ultimately, that translates to higher borrowing costs for state and local governments and capital improvement projects that are delayed, scaled back or cancelled altogether,” Nicholas said.

Under Camp’s plan, interest earned on bonds that agencies issue to refinance existing debt at lower rates also would no longer be tax exempt. Likewise, investors would have to pay taxes on the interest earned on private activity bonds, which are issued by local or state governments to finance projects by private businesses or organizations.

The 2005 surface transportation authorization (PL 109-59) allowed private activity bonds to be issued for the first time to pay for highway and freight transfer facilities. Public-private partnerships, including the Virginia Beltway HOT lanes, have taken advantage of this financing tool.

State and local governments and supporters in Congress have been wary that plans to restructure the federal tax code would target tax-exempt municipal bonds. Hundreds of lawmakers mobilized to preserve the tax exemption last summer, when tax overhaul discussions looked like they might get traction.

“Over the last decade, municipal bonds have funded more than $1.9 trillion worth of infrastructure construction,” the lawmakers said in a letter to House leaders. “This financing went to the construction of schools, hospitals, airports, affordable housing, water and sewer facilities, public power utilities, roads, and public transit. In 2012 alone, more than 6,600 tax-exempt bonds financed more than $179 billion in infrastructure spending.”

The 137 House members who signed the letter spanned the political spectrum, from liberals including California Democrat Henry A. Waxman to conservatives including Minnesota Republican Michele Bachmann.

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