08-14-2013 Council Agenda - Laserfiche WebLink

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Update on Tax - Exempt Bonds As part of the Fiscal Year 2014 Federal Budget Proposal, representatives of Congress and the President have recently proposed changes to either eliminate or reduce the ability of investors to declare interest paid on tax- exempt bonds exempt from federal income taxation, capping the interest deduction at 28 %. The National Association of Counties produced a study titled "Municipal Bonds Build America: A County Perspective on Changing the Tax - Exempt Status of Municipal Bond Interest". This study included an analysis of the municipal bond market and the estimated impact of a 28% cap and a repeal of the tax- exempt status of municipal bond interest of the 3,069 county governments. Main findings of the study include: 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, school districts, and other localities invested $3.2 trillion in infrastructure through long -term tax - exempt municipal bonds, 2.5 times more than the federal government. In terms of defaults, the ten -year cumulative average default rate from 1970 -2012 for municipal issuers with a Moody's Rating of "A" was 0.05% compared to 2.48% for corporate issuers with the same rating. 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 payments of municipal bonds. American households are the largest holders of municipal bonds, owning 45% of all municipal bonds outright, and another 29% of the market through mutual fund holdings. The study notes that half of Americans who hold municipal bonds are people over 65 years old and another 23% are between 55 and 65 years old. In 2010, 84% of Americans who benefited frotn the tax - exempt status of municipal bond interest earned less than $250,000 annually. If municipal bonds lose tax - exempt status, nearly all municipal bond holders would have to pay federal income taxes on the interest earned. In the case of a 28% cap, only investors in tax brackets above 28% would have to pay the difference between their federal income tax rate and 28% on their interest earned on their holdings of municipal bonds. At the same time, the higher debt service would impact counties and other state and local governments' budgets, directly affecting the taxpaying public. 3. In 2012 alone, the debt service burden for counties would have risen by $9 billion if municipal bonds were taxable over the last 15 years and by about $3.2 billion in case of a 28% minimum tax rate for certain income earners. At Ehlers, we feel our issuer clients are the strongest advocates for illustrating the importance of the tax - exemption of interest on municipal bonds. We have prepared a sample Resolution to be considered by your Governing Body supporting no changes to the exemption of interest on municipal bonds. A copy of the Resolution in Microsoft Word can be found on our website under "market update" in the lower right hand corner at www.ehlers- inc.com. We encourage passage of this Resolution by your Governing Body and forwarding a copy of the adopted Resolution to your congressional representatives.