If the phrase “tax-exempt municipal bonds” makes your eyes glaze over, bear with us. This is important.
To squeeze more revenue into federal coffers as proposed tax cuts become a reality, there is talk in the other Washington of eliminating the tax exemption for interest paid on municipal bonds.
Such bonds are issued in every corner of Washington — from Aberdeen to Zillah.
“Municipal bonds are the tools that governments used to create infrastructure projects — schools, bridges, roads, you name it,” said Washington Treasurer Mike Pellicciotti.
“It’s every level of government — fire districts, school districts, library districts — at the state, the city, county level. Most governmental entities rely on tax-free bonds as the tool to build the projects that constituents want in their community.”
Sold by local governments, munis have a lower interest rate because the interest is tax free from the federal government, thus making them competitive with corporate and other bonds that produce higher interest but are taxed.
It’s a huge market — around $4.1 trillion nationally — and extremely fragmented, with between 40,000-50,000 issuers. Munis are mainly held by individual investors who want something safe and stable in their portfolios.
Because the federal government forgoes between $32-$42 billion annually in estimated revenues, muni bonds were viewed as a tempting target in President Donald Trump’s first term. Informal economic advisers to the president such as Stephen Moore have again voiced support for taxing municipal bond interest.
This prospect prompted Pellicciotti to raise the alarm when visiting the state’s congressional delegation last month.
If munis lost the federal tax exemption, they would become a lot less attractive unless the interest rate matched the rest of the market.
And that would mean local residents would either foot a higher tax bill or get less for their money.
Pellicciotti noted that Washington has $12.8 billion of legislatively authorized but unissued bonding authority for needed transportation and capital projects. These are paid with a variety of revenues, from tolls to gas and business taxes.
Without tax exemption, costs for these unissued bonds are estimated to increase by 24%. This would mean an additional $4.9 billion in debt service for the state over the lifetime of those bonds.
If the Legislature passed on those costs to residents, it would amount to about $1,600 for each Washington household.
And that’s just for state bonds going forward. That estimate doesn’t take into account local governments, or if Congress revoked the tax exemption for previously sold bonds.
Lawmakers could scale back needed infrastructure projects, but there’s not always a lot of wiggle room for elected officials making tough decisions. A new sewer line, for example, can’t be easily shortened.
All this turmoil is to fund tax cuts that primarily benefit the wealthy, said Pellicciotti.
“This is a perfect example of where, through some wonky technical jargon, a legal change could be made in D.C. that passes costs directly to state and local taxpayers to pay for tax cuts for millionaires and billionaires. I mean, it is really that simple.”
Last week, Republicans in Congress took action that allowed them to move forward with crafting legislation to enact huge tax cuts and push it through over Democratic opposition.
The questions every American should ask: Who benefits immediately, who will be asked to wait and who will ultimately foot the bill?
