Miller: Tax-exempt Bonds At Risk In ‘Fiscal Cliff’ Debate

Treasurer’s Office

In addition to higher federal taxes, Oklahomans face another threat to their pocketbooks from the fiscal cliff, State Treasurer Ken Miller said today.

“Taxpayers in Oklahoma save an average of 25 to 30 percent on interest costs by using tax-exempt bonds as a financing tool as opposed to taxable bonds, but that could go away thanks to fiscal cliff negotiations,” Miller said.

Miller said investors accept lower interest rates due to the tax exemption and that saves billions of dollars per year in lower taxes nationwide.

“Tax-exempt bonds are the primary mechanism that states, counties, cities and school districts across the country use to finance highways, streets, bridges, water systems, school buildings and buses and many other public infrastructure projects,” he said.

Miller said this critical tool is now in danger of being eliminated as Congress and the President consider plans to either eliminate it or place a cap of 28 percent on the amount of interest bond investors can deduct from their taxable incomes.

“While fiscal sanity is sorely needed in Washington, shifting the tax burden from federal taxpayers to state and local taxpayers will not resolve the spending problem our country faces,” he said.

“A rough estimate shows that Oklahoma state government would have to spend an additional $30 million each year if the interest paid on its tax-exempt bonds were to become taxable,” Miller said. “For counties, municipalities and school districts, the cost would be much higher.”

The tax-exempt bonds issued by the counties, cities and school districts are retired using property taxes. If the tax-exemption is capped or eliminated, interest rates paid to the bondholders would rise and so could property taxes.

Miller said another alternative would be a reduction in the capital improvement projects funded by tax-exempt bonds or cuts in funding to core areas.

“Neither of these are attractive options,” he said.

Tax-exempt municipal bonds benefit states and localities in the following ways:

Local decision-making – States, counties, municipalities and school districts can build projects based on local priorities and needs assessments.

•  Responsible financing – States, counties, municipalities and school districts can 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 bonds are owned by individuals, either directly or through mutual funds. To continue drawing this private investment, states and localities need tax-exempt bonds.

•  Effective System – The tax-exempt bond market has worked effectively for decades. It’s not a loophole—the tax exemption was considered a fundamental right of states when the country adopted the 16th Amendment which allowed federal income taxes, and the principle that the income should be exempt was enshrined in the very first tax 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 best avoid the fiscal cliff, Washington politicians should understand that any attempt to reduce or eliminate the tax exemption on state and local infrastructure financing would have serious repercussions,” Miller said.

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