Members of Congress and other officials of the federal government have recently been discussing eliminating in whole or in part the tax-exemption for interest on bonds issued by state and local governments. The National Association of Bond Lawyers has released a paper on the importance of tax-exempt financing to state and local governments. The paper examines the arguments for eliminating or curtailing the exemption of interest on state and local bonds from federal income tax, and concludes:
- Eliminating or curtailing the exemption will result in less investment in infrastructure.
- Changes to the exemption will increase state and local borrowing costs, which costs will be passed on to the public.
- The burden of eliminating or curtailing the exemption will not fall primarily on upper-income taxpayers, but on state and local governments and their taxpayers and ratepayers.
- Proposals to tax the interest on bonds that are already in investors' hands will reduce the value of existing fixed-rate bonds and hurt those investors, most of whom are not upper-income.