As Congress and the president wrestle with solving the fiscal-cliff crisis, one issue should be of concern to middle-class taxpayers: to remove the tax-exempt status on municipal bonds. This isn’t getting a lot of attention but it should. If passed, it will not only raise taxes on middle-class families, but will also slow local job growth and stymie the building of needed public infrastructure.
The proposal would “raise revenues” for the federal government by removing tax exemptions on municipal bonds thereby raising taxes on those who buy those bonds. That may sound like a tax increase on wealthy investors, but it’s so much more than that. If the exemption is removed, the cost of building roads, highways, airports, water or sewer utilities and other types of public infrastructure will rise, forcing cities to either raise local property taxes to pay for them or forestall those projects altogether.
Here’s how it works: When a city needs to build, for example, a new sewer plant, expand a port or a construct a road, it must borrow the money to pay for that road. This is done by way of a municipal bond. Tax-exempt municipal bonds traditionally offer very low interest rates to investors because they are guaranteed by the good faith and credit of that particular municipality and also because that investor doesn’t have to pay federal income tax on the interest.
This is a win-win deal for everyone. The local community can responsibly borrow the necessary funding while saving taxpayers’ money. In turn, local jobs are created, facilities are built (or repaired) and the public’s needs are met in a cost efficient manner.
If Congress and the president choose to remove this common sense and low-cost way to keep taxes low while building needed infrastructure, the cost of building these things will rise and, as a result, taxes will go up. As most local taxes are paid via property taxes, this move would hurt middle-class homeowners the hardest.
Congress would be wise to find other ways to “raise revenue” or find federal cost-savings.
Manuel Maroño, president, Florida League of Cities, Sweetwater