NACo Policy research paper SERIES • ISSUE 1 • 2013

Municipal Bonds
Build America

A County Perspective on Changing the Tax-Exempt Status of Municipal Bond Interest

Emilia Istrate
NACo Director of Research

Acknowledgments
The author wants to thank the 45 counties that provided data on their 2012 interest payments on tax-exempt municipal bonds. I am also indebted to Dustin McDonald and the Government Financial Officers Association for all the help provided in collecting county interest payment data. The author is grateful to Councilwoman Helen Holton from Baltimore City,
Md. and Commissioner John O’Grady from Franklin County, Ohio for their support with the case studies. For the information in the case studies, I would like to thank Kenneth Wilson from Franklin County, Ohio, Tim Firestine from Montgomery County, Md., and Steve Kraus from Baltimore City, Md. For their substantive comments along the writing process and on a draft of the report, the author thanks Michael Decker, Matt Fabian, Susan Gaffney, George
Friedlander, Tim Firestine, and David Parkhurst.
Within the National Association of Counties, the author would like to thank Matt Chase for his critical advice and guidance on the entire process. Other NACo staff members — including
Michael Belarmino, Deborah Cox, Bob Fogel, Tom Goodman and Hadi Sedigh— made thoughtful and insightful contributions along the way. I also thank Camille Galdes for research assistance and for providing the maps used in this report, Nicholas Lyell for creating the website interactive for this report, Matthew Fellows for designing the webpage of the report, and Jack Hernandez for graphic design.

For More Information, contact:
Emilia Istrate, PhD
Director of Research
National Association of Counties
Phone: 202.942.4285 eistrate@naco.org Michael Belarmino
Associate Legislative Director
Associate General Counsel
National Association of Counties
Phone: 202.942.4254 mbelarmino@naco.org National Association of Counties

Municipal Bonds Build America

Executive Summary
Counties, states and other localities are the main funders of infrastructure in the United States.
Municipal bonds enable state and locals to build essential infrastructure projects, such as schools, hospitals and roads. Congress and the Administration are currently debating federal tax reform, including a cap or a repeal of the tax-exempt status of municipal bond interest. An analysis of the municipal bond market and of the estimated impact of a 28 percent cap and a repeal of the tax-exempt status of municipal bond interest on the 3,069 county governments reveals that:
1 – Municipal bonds finance a wide range of locally selected infrastructure projects and have a long history of low default rates. Between 2003 and 2012, counties, states and other localities invested $3.2 trillion in infrastructure through long-term tax-exempt municipal bonds, 2.5 times more than the federal investment. In counties, the legislature of the county government has to approve a bond issuance and often voters also approve the bond financing.
Municipal bonds maintain a track record of low default rates, better than comparable corporate bonds.
2 – Any tax imposed on currently tax-exempt municipal bond interest will affect all
Americans, as investors in municipal bonds and as taxpayers securing the payment of municipal bonds. American households hold almost three-quarters of the municipal bond market, Case Study for retirement plan diversification and as a way to invest in their communities. A cap or a repeal of the tax-exempt status of municipal bond interest would deeply affect Americans’ retirement nests and asset formation. In the same time, the higher debt service would impact counties and other state and local governments’ budgets and directly affect taxpayers.
3 – In 2012 alone, the debt service burden for counties would have risen by $9 billion if municipal bonds were taxable over