Proposal to change tax status harms counties, taxpayers, study says.

• Position: News & Numbers

Changing the tax-exempt status of municipal bond interest is costly and risky to American investors, local taxpayers, and counties, according to new research from the National Association of Counties.

Municipal Bonds Build America: A County Perspective on Changing the Tax-exempt Status of Municipal Bond Interest estimates the cost for counties and for all municipal bond issuers if a repeal were enacted, or if municipal bond interest were capped at 28 percent. The study significantly expands a previously released study in February 2013, issued jointly with the U.S. Conference of Mayors and the National League of Cities.

Counties are concerned about a fiscal 2014 budget proposal by the Obama administration that mirrors a 2011 proposal proposing a 28 percent cap on the benefit accruing to investors in tax-exempt municipal bonds, the report notes. Action in Congress is also of concern, as reports have circulated indicating that congressional tax reformers are casting an eye on the tax-exempt status of municipal bonds.

The new NACo study of the municipal bond market and of the 2012 estimated impact of changes to the tax-exempt status of municipal bond interest shows that:

* Any change would severely affect the ability of counties to invest in infrastructure and to deliver services to their residents.

* Counties invest more than $52.3 billion annually in public works projects. For 2012, county interest costs would have increased by $9 billion if municipal bond earnings had been taxable over the last 15 years, and by about $3.2 billion with a 28 percent cap.

* American investors and taxpayers will be hurt by taxing municipal bonds.

It's not only the very wealthy who favor municipal bonds as investments, the report points out. American households hold almost three-quarters of the municipal bond market mainly for retirement plan diversification and as a way to invest in their communities. A cap or repeal of the tax-exempt status of municipal bond interest would affect Americans'...