Reader's View by Idaho State Treasurer Ron Crane: Keep tax exemption on municipal bonds

August 6, 2013 

Did you know in Idaho we save an average of 25 to 30 percent on interest costs by using tax-exempt municipal bonds as a financing tool as opposed to taxable bonds?

Those lower interest rates save Idaho taxpayers millions of dollars per year. In fact, tax-exempt municipal bonds are the primary mechanism that state and local governments across the country use to finance highways, bridges, water systems, schools and many other public infrastructure projects.

This critical tool is now in danger of being eliminated, as the federal government is considering plans to either cap the tax exemption at 28 percent or eliminate it altogether. As Idaho's treasurer, I am opposed to efforts to eliminate or reduce the tax exemption for municipal bonds. While everyone wants to see fiscal responsibility in Washington, shifting costs from the federal government to the states will hurt the states, and it won't resolve the fiscal problems our country faces.

The cost savings that state and local governments are able to realize through tax-exempt municipal bonds occur primarily because investors are willing to accept lower interest rates on these bonds in conjunction with the tax benefit. If that exemption is capped or eliminated, the attractiveness of municipal bonds would be reduced, forcing Idaho to pay higher interest costs. The result? Idaho, like other states and localities across the country, will be forced to issue fewer bonds, cut funding from other important projects or raise taxes. None of these are attractive options.

The fact is that tax-exempt municipal bonds save states and localities billions of dollars each year in financing costs.

They have many benefits, including:

• Local decision-making: States and localities can build projects based on local priorities and needs assessments.

• Responsible financing: State and local governments borrow responsibly for capital projects. Bond issuance has remained stable relative to GDP for the past 10 years.

• Private capital: Bonds bring private capital to public projects. In an age of constrained federal and state budgets, this is essential. More than 60 percent of municipal bonds are owned by individuals, either directly or through mutual funds. To continue drawing this private investment, states and localities need tax-exempt bonds.

• An effective system: The tax-exempt bond market has worked effectively for decades. It's not a loophole - the tax exemption was part of the agreement reached between the states and federal government that led to the adoption of the 16th Amendment allowing federal income taxes. One alternative to this could read: The tax exemption was considered a fundamental right of states when the country adopted the 16th Amendment, which allows federal income taxes, and the principle that the income should be exempt was enshrined in the very first federal income tax code, in 1913.

• Reciprocity: While the federal government provides a tax exemption on state and local bond interest, the states likewise do not tax the interest on federal bonds.

As the debate continues on how to cut spending, let's keep in mind that all of these decisions have serious repercussions. This is such an important issue that treasurers across the country agree with me. As a member of the bipartisan National Association of State Treasurers, we are urging our colleagues in Washington to consider the impact of this proposed change on individual states. Any attempt to balance the federal budget on the backs of states and localities is simply passing the buck.

This administration hasn't met a tax it doesn't like, and its ingenuity for extracting money from states and individuals never ceases. The liberal appetite for spending money - yours and mine - is insatiable. You see, Washington doesn't have a revenue problem - it has a spending problem. The last thing Idahoans need is a new federal tax on municipal bonds!

Please contact your senators and congressmen today and urge them to retain the tax exemption on municipal bonds!

Ron Crane is the Idaho state treasurer.

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