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Municipal Bond Interest Tax-Exemption Targeted in Federal Budget Discussions

December 7, 2012

As 2012 draws to a close, the federal government is struggling with the looming fiscal cliff. While there is bipartisan support to avoid sequestration, how to do that remains controversial. 


Eliminating or limiting the federal tax exemption on interest earned from municipal bonds is one particularly troublesome proposal on the table in both the fiscal cliff and future federal tax reform discussions.

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 things like schools, roads, sewer systems, bridges and fire stations will increase.  

When talking to congressional representatives, cities should stress the importance of keeping municipal bonds exempt from taxes. Representatives should remember:

  • Tax exempt bonds fund local infrastructure that creates and supports jobs and competitive businesses nationwide.
  • It is imperative that Congress protect the ability of state and local governments to access cost-effective capital through the use of tax-exempt municipal bonds. 
  • While deficit reduction is important, it is also important that the federal budget is not balanced at the expense of local governments that are already struggling with their own budget challenges.  

More information on this issue can be found on the Municipal Bonds for America's website. A copy of the League’s letter, as well as a sample letter for cities, can be found on the League’s website.

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