Don't fix it, if it isn't broken.
Recently, I was one of the first state treasurers in the nation to sign onto a letter from the National Association of State Treasurers urging members of the U.S. House Ways and Means Committee to maintain the current tax exempt status for municipal bonds.
The White House and congressional tax writers have proposed a cap on the current tax exempt status of municipal bonds. While this proposal may be well-intended, I believe it is misguided.
It is an issue that could have long-term ramifications for Kentucky's budget and our public infrastructure projects. State and local governments use municipal bonds as the primary means of financing highways, bridges, transit systems, airports, water and wastewater systems, schools, higher education facilities and many other public projects.
According to a recent report from "Transportation for America": Of Kentucky's 13,842 bridges, over 1,300 are structurally deficient. Millions of Kentuckians use these deteriorating bridges. Bridges in rural counties serve as lifelines to jobs, medical services and the inflow of needed staples like food. Urban bridges carry high volumes of traffic and are important economic arteries.
According to the Kentucky Department of Education, 226 of Kentucky's 486 primary and secondary school buildings are over 50 years old. They estimate that it will cost $3.7 billion to bring them up to standard.
These projects create jobs and stimulate economic growth. Capping the tax exemption at 28 percent for top income earners, as proposed, could drastically reduce investor demand for municipal bonds, thereby increasing financing costs to states and localities. Higher financing costs could lead to higher state and local taxes and limited public investment in infrastructure. Additionally, a 28-percent cap is likely to have a disruptive effect on the bond market. Applying it retroactively would immediately reduce the value of bonds.
The negative public policy implications could be dramatic. As we saw in December 2012, the bond market experienced dramatic rate increases in reaction to proposals to cap tax exemption as part of the fiscal cliff debate.
As the president pointed out in his State of the Union Address, "What our businesses need most [are] modern ports to move our goods, modern pipelines to withstand a storm, and modern schools worthy of our children." I could not agree more. The need in our state to upgrade and maintain our bridges and roads and the need for jobs that this maintenance creates has never been greater.
The fact is that tax exempt municipal bonds save states and localities billions of dollars each year in financing costs. Access to a healthy tax exempt municipal bond market has served as a responsible and effective way to bring private capital to public projects and promote local decision-making based upon local priorities.
Eliminating or reducing the tax exempt status of these bonds will result in fewer projects, fewer jobs, and a continually deteriorating infrastructure. It will threaten economic growth by making it more costly for governments, and ultimately taxpayers, to finance these projects.
As treasurer of the Commonwealth of Kentucky, I welcome discussion of new ways to meet our shared financial challenges. However, any new tool should be in addition to, not instead of, the primary financing mechanism that states have used for over a century to fund critical infrastructure projects. I will continue to stand with my fellow state treasurers from across the United States on this issue to ensure the tax exempt status of municipal bonds remains in place. I encourage all Kentuckians to contact their U.S. representatives and let them know that our safety, security, and financial prosperity should be their first priority.
Let's not dismantle something that works.
Todd Hollenbach is Kentucky state treasurer.