Treasurer Kennedy Calls on Congress to Protect Tax Exempt Municipal Bonds

BATON ROUGE, La. – The Obama Administration released its 2014 budget this week, and the spending plan’s cap on the tax exempt status of municipal bonds could prove detrimental to state and local governments, according to State Treasurer John Kennedy.

“If you curb the tax advantages of the municipal bond market, it would jeopardize the state’s and municipalities’ access to low-cost financing,” said Treasurer Kennedy. “This would result in higher interest rates and increased borrowing costs for much-needed infrastructure projects in Louisiana and other states. It would also place an additional and unnecessary financial strain on cash-strapped public entities.”

The federal government’s budget for 2014 includes a 28 percent cap on the tax exemption for municipal bonds. The Obama Administration has floated the idea for a cap before, but interest in the proposal picked up when the country faced the fiscal cliff several months ago. Other proposals, including one from the Simpson-Bowles Commission, would eliminate the tax exemption for municipal bonds altogether.

In March, Treasurer Kennedy joined his colleagues from other states in meetings with senior White House officials and Congressional leaders to urge the federal government to keep the tax exemption for municipal bonds. The treasurers argued that maintaining the tax exempt status of the municipal bond market was vital to state and local governmental entities that depend on the bonds to finance necessary infrastructure improvements like new roads and schools.

States and localities are able to finance infrastructure projects at a lower interest rate and a much cheaper cost by selling municipal bonds to investors. Investors who buy municipal bonds do not expect a high rate of return on their investment because they receive a tax exemption when they file their federal tax returns.

State and local governments depend on the tax exemption provided for municipal bonds,” said Treasurer Kennedy. “When an exemption is working to achieve its purpose, you keep it or even double-down on it, you don’t reduce it. The proposed cap would make it more expensive for states and municipalities to build projects, borrow money and conduct business. Congress must act to protect this vital means of state and local government financing.”

Sarah Mulhearn
(225) 342-0012