Buried in the pages of President Obama's most recent budget proposal is a provision that stands to severely undermine the economic health of local communities across the country.
At stake is the tax-exempt status for municipal bonds, the primary tool that local governments have used since 1913 to finance public infrastructure projects, with the strong support of Presidents Wilson, Harding, Coolidge, Hoover, Roosevelt, Truman, Eisenhower, Kennedy, Johnson, Nixon, Ford, Carter, Reagan, George H.W. Bush, Clinton and George W. Bush. Municipal bonds have financed trillions of dollars of investment in schools, roads, water and sewer systems, airports, bridges and other vital infrastructure. The exemption has made the cost of borrowing money significantly less expensive for cities, counties and states, allowing them to get more mileage out of every dollar they spend and better serve their constituents. In 2012 alone, more than 6,600 tax-exempt municipal bonds financed $179 billion worth of infrastructure projects, the bulk of which were schools, water and sewer facilities, and hospitals.
But in an effort to generate more revenue, President Obama has now put forth a plan that would impose a tax-benefit cap of 28 percent, down from 39.6 percent, on the exemption. In theory, their argument goes, this would limit the size of the loophole that the very rich among us get to enjoy and level the playing field so that everyone pays their fair share. But in reality, all this does is increase the borrowing costs local governments have to pay, shifting the financial burden of basic public services and projects onto the shoulders of everyday middle-class citizens, due to an increase in property and local taxes.
If, for instance, this cap had been in effect during the last decade, it would have cost state, city and county governments, and by extension taxpayers, an additional $173 billion in financing costs. Think about it. That's $173 billion less that could have been invested in improving the quality of our cities' infrastructure.
Ironically, politicians in Washington talk a lot about the need to create jobs so that people can begin to build a path towards prosperity. But with potentially $173 billion less at their disposal, cities and counties cannot embark on building projects that would create such jobs, bolster economic growth and improve the over-all quality of life for Americans.
Now is not the time to make this kind of a cut. Curtailing tax exemption would raise costs for financially strapped local governments and exacerbate the challenges they are already facing. At a time when jobs are scarce and the physical state of our public works is deteriorating, local and state officials do not need to be hit in the knee cap when they can barely steady their economic legs. First, the Great Recession hit them. Then came Sequestration. And now comes the threat of losing the single most important mechanism that gives cities and states half a chance at thriving.
The federal government just continues to kick the can down the road. With no additional funding from Washington in the pipeline for infrastructure projects, tax-exempt bonds are all local officials have to keep their cities, counties and states functioning. In the absence of that, they will be forced to impose a regressive tax. What other choice will they have? The trash still needs to be picked up. The potholes still need to be filled. Services that citizens rely on every day so that they can go about their lives still need to be in place.
While the cap to tax-exempt municipal bonds appears to help solve Washington's financial problems, its ripple effect will have devastating consequences, hitting states, cities and counties and ordinary citizens at a time when they least can afford it. With 12 million people unemployed as we do everything we can do in this nation to recover from the greatest recession since the Great Depression, city and county elected officials are saying to Washington -- don't take away this 100-year-old law that has helped make this great nation what it is. Don't mess with our bonds. Its about economic growth so badly needed -- new schools, bridges, hospitals, water and sewer systems, roads and yes -- it's about jobs.
The president has proposed. The Congress must now depose. We will now move to Congress to let every member know that this is not about cities, counties, and states -- it's about the economic growth of this great nation.