State and local governments have powered through adversity over the last two years despite the crippling effects of the 2017 tax reform law. The threat to municipal bonds still exists, however. If state and local governments lose the ability to use tax-exempt bonds and are compelled to issue taxable bonds as an alternative, debt issuance costs would increase by an estimated 25 percent, 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 between 2009 and 2019 totaled $4.2 trillion (see Exhibit 1).
Communities across the country would be negatively affected if federal tax policy were to reduce the financial power of state and local governments to meet their capital needs. Further complicating the situation, federal assistance--including categorical grants and general revenue sharing-- has also been reduced or eliminated, and costs have risen because of 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.
FEDERAL INFRASTRUCTURE POLICY
The Tax Cuts and Jobs Act (TCJA), passed by Congress and signed into law in 2017, made several changes to the tax code that are important to state and local 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.
* the reduction of the corporate tax rate and elimination of some corporate, bank, and insurance tax incentives for purchasing municipal securities.
These changes have created a difficult finance environment for many public issuers to address critical needs like developing or updating local infrastructure. Our federal partners need to address these challenges, whether it is through program funding or policy changes, which would include adopting municipal bond modernization provisions. State and local governments have a proven track record of resilience, but it takes all levels of government working together for the good of all our constituents.
ISSUING BONDS IN A DYNAMIC MARKET
Advance refundings represented 27 percent of municipal bond market activity in 2016 and 19 percent in 2017. (1) Additionally, the TCJA decreased the overall...