Muncipalities Fear Fiscal Cliff Deal Could Tax Local Bonds

If President Obama and Congress manage to avoid the so-called “fiscal cliff,” the country will no doubt be vastly relieved. But, as some municipal planners analyze possible solutions, they are wondering – could the cure be as bad as the disease? 

WE’ve heard about ways the fiscal cliff might be averted – ending the Bush-era tax cuts on high earners, raising the social security age, limiting some federal health benefits or the home mortgage tax deduction. But There’s one option that’s really making municipalities uneasy. Geoff Beckwith is president of the Massachusetts Municipal Association.

“As Washington looks around for revenues, it’s possible they they’ll actually find what would be an artificial federal revenue that would boost federal coffers but have a dramatic negative impact on towns and cities and states,” Beckwith said. “And that is elimination of a tax exempt municipal bonds.

Beckwith says that in their search for new revenues, lawmakers may turn to municipal bond interest — which right now is exempt from federal income tax. Municipal leaders are concerned the exemption might be capped for higher-income earners, or even eliminated.

That would mean cities and towns would have to offer higher interest rates to attract investors who no longer would get the tax break – meaning higher costs for local taxpayers, says Mike Nicholas – CEO of the Bond Dealers of America.

“So the people that pay for it are you and me, now the water bill goes up, or the toll goes up, because it costs more money to issue a water and sewer bond,” he said. “It’s not too hard to connect dots to show how it’s a burden on state and local governments, and a tax increase on everybody.”

Nicholas says taxing municipal bonds could bring more than 100 billion dollars to the federal treasury over the next ten years. A tempting target he says, but the result could actually hurt Main Street more than it would Wall Street.