As there is very little information coming out after the meetings, it is difficult to say what will be part of the package. Once the details are released, it may be too late for cities to weigh in. As such, cities need to continue to be vigilant on several issues that could potentially harm municipal budgets.
Muni Bond Tax Breaks
The idea to either cap or eliminate the tax exemption for interest earned from municipal bonds continues to be on the table. Municipal bond interest is, and has always been, exempt from taxes. This distinction provides a significant benefit to investors, and allows cities access to investors they would not typically reach in the taxable bond market. If the bond interest exemption is either eliminated or capped, the costs for infrastructure financing for projects like schools, roads, sewer systems, bridges and fire stations will increase.
The proposal to cap or eliminate the bond interest exemption is one that seems to have potential agreement from both sides. It is critical that city officials communicate the importance of maintaining the tax exemption to their congressional representatives in any way possible. If you are a small or rural city this is especially important as many congressional members view this as a large urban city issue. If this issue is not adopted as part of the plan to avoid the fiscal cliff, it is likely to be part of a broader tax reform package in 2013.
For our original story on this topic, please see the Dec. 7 CA Cities Advocate article “Municipal Bond Interest Tax-Exemption Targeted in Federal Budget Discussions.”
Congress passed the Budget Control Act (PL 112-25) in July 2011, which established mandatory spending caps on most federal programs through 2021, and arranged additional across-the-board annual spending cuts to federal defense and non-defense discretionary programs over this same period. Included in non-defense discretionary (NDD) programs are critical local government oriented programs, which include the Community Development Block Grant (CDBG), HOME Investment Partnership, COPS and Byrne Justice Assistance Grants. These programs have already experienced significant cuts over the last two federal fiscal years, and under federal sequestration, additional cuts of approximately 8.4 percent would be imposed on these programs for FY 2013 starting on Jan. 2, 2013.
From 2013 through 2021, funding for these programs would be reduced by nearly 28 percent. Federal surface transportation funding will also be cut. In addition, sequestration would significantly impact national defense programs. These cuts would be particularly harmful to California, which stands to lose $2 billion in defense contract revenue through the sequester, resulting in an estimated loss of 135,000 private-sector jobs and $11.7 billion in gross state product.
The National League of Cities updated their advocacy materials this week for issues that may be part of the fiscal cliff discussions. In addition, the League’s letter and a sample letter for cities can be found on the League's federal webpage. Additional background and materials can be found on Municipal Bonds for America's website.
City officials are encouraged to take action immediately.