Tax-exempt bonds again on the chopping block?

There’s more talk again today that Congress may get rid of tax-exempt municipal bonds, which are one of the main subsidies that the government provides to not just sports stadiums but all local development projects. (Short version: The IRS doesn’t collect income tax on money earned by bondholders, allowing them to accept lower interest rates, allowing cities to borrow money to build stuff for cheaper than they would otherwise.) This time it’s the Tampa Tribune speculating that the federal government may get rid of the tax exemption during upcoming debt ceiling talks, but it’s a topic that been kicking around elsewhere of late, as apparently nothing is off the table when it comes to filling the budget gap that Washington is suddenly obsessed over.

This would almost certainly be a good thing all around, as tax-exempt bonds have been abused for decades as a way for local governments to fob off costs to federal taxpayers, not just for genuine public projects but for private entities like sports teams. (Stadiums were supposed to be exempted by the 1986 Tax Reform Act, but sports teams found a way around it. A bunch of ways, actually.) If the feds really want to help local governments build parks and libraries, they can just give them cash; tax-exempt bonds are a backdoor way of doing the same thing that’s ripe for abuses, especially since it obscures the subsidy and makes it harder for the public to see what’s actually getting taxpayer dollars.

It’s still pretty unlikely that anything will change — we heard this same talk before the fiscal cliff negotiations, after all, and nothing came of it. And lobbyists for bond companies and local governments alike are already gearing up to fight any attempt to eliminate or reduce the tax break. Still, if something does happen, it would dramatically increase the cost of sports facilities and shake up current construction plans across the nation, so it’s worth keeping an eye on.

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4 comments on “Tax-exempt bonds again on the chopping block?

  1. Man, I sure hope so. Anything that makes it more difficult to pit one city against another is progress.

    Maybe instead of getting rid of the exemption completely, they should specify what kind of infrastructure projects do not qualify for this tax break, though.

  2. I’m actually in favour of keeping the tax exempt bonds status… but only for legitimate municipal service projects. How you define what does and doesn’t pass the smell test there is the issue, and as I recall it’s only relatively recently that cities/states have tried to use these instruments primarily for the benefit of private companies.

    It seems unlikely that they’ll scrap these things, given that they do drive significant economic activity and the nation is at a point where it can’t really take much in the way of economic ‘cooling’.

  3. Agreed re the effect on the economy. (Did I not mention that in my original post? Looks like I didn’t — whoops.) They just killed the payroll tax cut, though, which will have a huge cooling effect, so it doesn’t look like that’s a big concern of Congress right now. They probably won’t do it because it would piss off too many people, though.

    As for keeping it for “legitimate” projects, that’s what they tried to do in 1986, and stadium developers immediately found loopholes. I like the idea of tax-exempt bonds for worthy projects in theory, but in reality I think it’d be more worthwhile for the feds just to fund these projects directly, rather than via some Rube Goldberg bond-rate-manipulation device.

  4. Good points, Neil. I would imagine the reason the feds don’t want to do direct funding is that they’d need an “approval” agency to do so, and that an “open” tax exempt bond plan/scheme gives (or at least looks like it gives) the states more autonomy over what they do… IE: they don’t have to wait for Uncle Sam to get around to giving the ok before putting shovels in the ground.

    Having said that, they could achieve the same thing by just coughing up the money to states up front and letting them decide what to do with it. You know, sort of like they did for AIG, BoA and all those other great capitalist institutions…

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