There is no doubt that state and local governments powered through adversity the last two years, continuing to provide quality infrastructure, healthy communities and rally a strong bond market despite the crippling effects of the 2017 tax reform law. The steadfastness of state and local governments exhibits an unparalleled accomplishment of our investments via the municipal bond toward our nation's infrastructure.
We remain concerned that the threat of elimination is still prevalent. If state and local governments lose the ability to use tax-exempt bonds and are compelled to issue taxable bonds as an alternative, it is estimated that debt issuance costs would increase around 25%, and possibly more for smaller governments.
Tax-exempt bonds are the primary mechanism through which state and local governments raise capital to finance a wide range of essential public projects. The volume of municipal bond issuance for the period from 2009 to 2019 amounted to $4.2 trillion.
Communities across the country would be negatively impacted if federal tax policy reduced the financial power of state and local governments to meet their capital needs. This further exacerbates the current situation faced by state and local governments in continued reductions or elimination of federal assistance of various kinds over the years, including categorical grants and general revenue sharing, and seeing a rise in costs due to federal mandates (legislative or regulatory requirements imposed by the federal government upon states and localities). No federal program has or would be able to finance all the capital needs across the country. For over 100 years, the municipal bond market has worked fairly and efficiently to address these needs, whether it is in our largest states and cities or the rural areas across the United States.
Current State of Federal Infrastructure Policy
The Tax Cuts and Jobs Act (TCJA) passed by Congress and signed into law by the President in 2017 made several changes to the tax code of interest to governments. Although the full tax exemption for municipal bond interest was successfully retained, other changes noteworthy to issuers of municipal bonds include:
- the elimination of advance refundings;
- the elimination of tax credit bond programs; and
- the reduction of the corporate tax rate and elimination of some corporate, bank and insurance tax incentives to purchase municipal securities.
Unfortunately, this has created a difficult finance environment for many public issuers to address critical needs like developing or updating local infrastructure. Whether it is through program funding or policy changes, which includes adopting municipal bond modernization provisions, we NEED our federal partners to help us address these challenges. We have a proven track record of resilience but it takes all levels of government working together for the good of all our constituents.