The looming expiration the Tax Cuts and Jobs Act (TCJA, 2017) has reignited the debate about the federal personal income tax exemption for municipal bonds. Federal policymakers are seeking ways to ‘pay for,’ or extend, the terms of several of the tax cuts enacted in the TCJA by eliminating certain tax provisions in addition to enacting federal spending reductions.
The tax exemption for municipal bonds has been crucial in securing cost-effective financing for essential facilities and services throughout the United States. This includes funding for state and local governments, K-12 schools, colleges and universities, roads and airports, hospitals, water and sewer utilities, housing, and more. The exemption plays a vital role in financing infrastructure in both rural and urban communities.
Repealing of the exemption will increase the costs to construct or purchase the public infrastructure and capital. If enacted, costs will rise at a time when Michigan communities need greater investment and more asset management of public facilities. Higher capital costs could result in increased taxes for local taxpayers.
IN A NUTSHELL
— Bonds issued by state and local governments are federally tax-exempt, allowing state and local governments to issue debt at lower interest rates.
— The U.S. Congress is considering including interest earned on municipal bonds in federal taxable income for investors in state and local government bonds. This change will increase the interest rates state and local governments would have to pay for their bonds, and increase costs for their taxpayers.
— Changing the federal tax treatment of municipal bonds would bring uncertainty and disruption to the bond markets, delaying planning, budgeting, and much needed investment in Michigan’s public infrastructure.
