Ct. Urges Retention of Municipal Bond Tax Treatment

April 12, 2013 (PLANSPONSOR.com) - Connecticut State Treasurer Denise L. Nappier is urging Congress to keep intact the federal tax exemption on municipal bonds.

In a letter to Congressional leaders, Nappier wrote: “[W]e write to express our views regarding recent proposals that state and local bonds should no longer be treated as tax exempt for federal income tax purposes. In the strongest terms, we urge Congress not to alter the overall federal tax treatment of interest on state and local government bonds.”  

Nappier pointed out that these bonds are overwhelmingly issued to fund public infrastructure projects. Bonds are also sometimes issued to raise retirement system funds.  

According to Nappier, without this federal tax exemption on municipal bonds, state and local governments could face higher borrowing costs—as much as $1.9 billion over the next ten years in Connecticut.

Nappier suggested an alternative plan for reducing the deficit:“The ‘market discount rule’ for tax-exempt bonds creates a distortion in the municipal bond market by adding above-market coupons to bond costs. Besides reducing the federal deficit, an added advantage would be fewer and smaller bond refundings, thereby saving issuance costs and freeing funds for productive investment,” she said.     

“At a time when many state and local governments are seeking ways to trim budgets, this deficit reduction measure would help their efforts,” Nappier wrote. “It could be a real contribution to the financial health of the municipal bond market, removing current market distortions, while at the same time assisting in the goal of federal deficit reduction without requiring the damaging step of repealing the tax exemption on municipal bonds.”    

Nappier is also a signatory, along with other State Treasurers, to a letter that the National Association of State Treasurers is sending, which calls on Congress to maintain the current tax exemption for municipal bond interest. “Tax-exempt municipal bonds provide a mechanism for bringing private capital to public projects,” say the signatories, “while saving an average of 25 to 30% on interest costs compared to taxable bonds.In an age of constrained federal and state budgets, the ability to save billions of dollars on infrastructure financing is essential.”