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Officials warn ending federal tax exemption for municipal bonds would raise borrowing costs for Minnesota communities
Summary
Advisors and state officials told the Capital Investment Committee that eliminating federal tax exemption for municipal bonds would raise borrowing costs, reduce project scope and slow infrastructure, housing and water projects across Minnesota.
Advisers and state officials on March 18 warned the House Capital Investment Committee that a federal proposal to eliminate the tax-exempt status of municipal bonds would substantially increase borrowing costs for state and local issuers and could reduce the number of projects communities can afford.
Jessica Cameron Mitchell, managing director and partner at PFM Financial Advisors LLC, said municipal tax exemption functions as a federal subsidy that lowers interest costs for state and local issuers. Using recent market comparisons of taxable and tax-exempt sales, Mitchell illustrated that identical 20-year financings can cost issuers an estimated 10% to 16% more in principal or 15%–16% more in total debt service if issued taxable rather than tax-exempt, depending on market conditions and credit quality. “Borrowing for public infrastructure will be more expensive if municipal tax exemption is lost,” Mitchell told the committee.
Jen Hassimer, assistant commissioner at Minnesota Management and Budget, told the committee that Minnesota's AAA-rated state debt sales last summer raised about $1.3 billion at interest rates near 3.2%. Hassimer said MMB estimates interest costs on state bonds could increase by about 1.5 percentage points or more if federal tax exemption is removed; higher borrowing costs would raise the state's debt service burden and could prevent some projects from moving forward. She said Minnesota has approximately $2.5 billion in previously authorized debt that has not yet been sold; that unsold debt would become more expensive to finance if the exemption were eliminated.
Jennifer Ho, commissioner of Minnesota Housing, said private activity tax-exempt bonds are critical to single-family and multifamily financing. Ho said Minnesota Housing issued more than $500 million in tax-exempt housing bonds recently and ranks 23rd nationally by volume; she described tax exemption as vital to programs that help about 40,000 Minnesotans buy homes over the past decade.
The executive director of the Public Facilities Authority (name not specified in the transcript) described direct impacts to drinking-water and wastewater borrowers. The authority reported it made $226 million in loans to 46 borrowers during the fiscal year to date; because of tax-exempt financing and authority discounts, borrowers were estimated to pay $53.4 million in interest under tax-exempt financing but would pay about $81.8 million if the debt were taxable — a $28.4 million difference (roughly a 50% increase) on the loans the authority has made so far this year. The director said the authority's revenue bonds are secured by the funds's assets and revenues, not the state general fund.
Panelists urged the committee to monitor federal negotiations over tax-policy offsets and to relay the local effects to congressional delegations. Several witnesses and agency officials said they are actively advocating in Washington and coordinating with national associations to preserve the municipal tax exemption.
No federal legislation has been enacted removing the exemption; testimony focused on potential impacts and advocacy strategies.
