Resolution 13-01 Sponsors: Salt River Project; Minnesota Municipal Utilities Association; Snohomish County PUD; Energy Northwest; Washington Public Utility Districts Association In Support of Municipal Bonds 1 For more than 200 years, municipal bonds have allowed state and local governments to make the 2 investments necessary to provide for their communities’ well-being, growth, and economic development. 3 In a series of cases in the 1800s, the U.S. Supreme Court found that these bond issuances were a 4 constitutionally protected exercise of governmental authority and, as a result, just as state and local 5 governments could not tax Federal bonds, bills, and notes, so the federal government could not tax state 6 and local bonds. As a result, when the federal income tax was enacted in 1913, it excluded from income 7 the interest earned on municipal bonds. 8 9 Since then, there have been periodic efforts to overturn this precedent by taxing in whole, or in part, this 10 interest. Each time these efforts have been rebuffed, but with the nation currently facing huge fiscal 11 challenges, municipal bonds face their greatest risk of being taxed in a generation. Both parties’ candidate 12 for president in the 2012 campaign considered a surtax on municipal bond interest to provide revenue to 13 reduce the federal budget deficit or to offset the cost of a federal income tax rate cut. Such a surtax was 14 included in offers by lead negotiators of both parties in end-of-year budget talks in December 2012. 15 16 Proponents of such changes often have attempted to obscure their effect: describing them as a 17 replacement, a “cap,” or a “limit,” but, in fact, all such changes would simply impose a federal tax, in 18 whole or in part, on the interest on municipal bonds. This is true whether the proposal is an outright repeal 19 of the exclusion, a “cap” on the exclusion, or a replacement of municipal bonds with a taxable bond the 20 interest for which the issuer received a federal subsidy or for which the bond-holder received a tax credit. 21 And all publicly available research indicates that such taxes would—at the levels being discussed— 22 increase state and local borrowing costs, an increase that will result in higher taxes or higher utility rates 23 for state and local residents. 24 25 Those championing such changes claim that the current exclusion for municipal bond interest provides an 26 inefficient—and inappropriate—windfall to wealthy investors. These criticisms ignore both substantial 27 research questioning estimates of inefficiency and publicly available data that more than 50 percent of all 28 bond interest paid to individuals goes to those with incomes of less than $250,000. They ignore the 29 important role municipal bonds play in providing a safe and reliable investment vehicle for retirees 30 looking for a steady source of income with a default rate effectively of zero for investment-grade 31 issuances. They also ignore the fact that any change to the tax treatment of municipal bonds will hurt all 32 bond-holders, regardless of income, and increase borrowing costs for bond issuers and thus increase taxes 33 or utility rates for all local residents. 34 35 Others claim that the exclusion for municipal bond interest is a subsidy from the federal government, 36 ignoring the exclusion’s history: that bond interest is excluded from income to prevent the federal 37 government from interfering with legitimate, and constitutionally protected, state and local governing 38 decisions. They also ignore the reason such a change in the 100-year law is being contemplated – to push 39 federal budget costs onto state and local governments. 40 41 NOW, THEREFORE, BE IT RESOLVED: That the American Public Power Association (APPA) 42 continues to oppose any efforts to interfere in state and local governing decisions by taxing, wholly or in 43 part, the interest on municipal bonds; 44 45 BE IT FURTHER RESOLVED: That because they will increase state and local borrowing costs and, as 46 a result, costs for our ratepayers, APPA opposes any such new taxes, including: 47 48 • 49 50 to “cap” the tax value of municipal bonds; • 51 52 A surtax on municipal bond interest for bondholders with incomes above a certain level intended A tax on municipal bond interest above a certain specified annual dollar limit, also known as a “flat dollar cap;” • A tax on all municipal bond interest with the federal government to give issuers a partial 53 reimbursement of interest expenses, i.e., a replacement of municipal bonds with “direct payment” 54 bonds; and 55 • A tax on all municipal bond interest with the federal government to provide bondholders with a 56 tax credit equal to a portion of the amount of interest paid, i.e., a replacement of municipal bonds 57 with “tax credit” bonds; and 58 59 BE IT FURTHER RESOLVED: That APPA will work with all stakeholders to ensure that this 60 important financing tool remains available for now and for future generations.