GUEST COLUMN.
REPEAL OF THE MUNI-BOND TAX EXEMPTION WOULD THREATEN US INFRASTRUCTURE
By Tom Kozlik, Head of Public Policy and Municipal Strategy at HilltopSecurities
The largest investment in American infrastructure – three out of every four dollars – comes from state and local governments, and that doesn’t totally account for the infrastructure created by other public entities like hospitals, universities and housing agencies.
This investment is made possible partially through financing via the municipal bond tax-exemption, which serves as the cornerstone of public infrastructure financing, and thus a catalyst of American growth.
Despite the proven benefits of the tax-exemption, political focus on deficit reduction after the Great Recession put the municipal bond tax-exemption on the chopping block. The Bowles-Simpson Commission's December 2010 report, The Moment of Truth, recommended the complete elimination of the tax-exemption.
But it survived, and America recovered with almost a decade of growth powered by infrastructure.
In the negotiations surrounding the 2017 Tax Cuts and Jobs Act, some lawmakers proposed eliminating the tax-exemption for private activity bonds, which are primarily issued by non-profit hospitals, universities, and housing authorities. That exemption largely survived. But lawmakers did repeal the use of tax-exempt bonds for advance refundings to help pay-for 2017 tax policy. In other words, Congress sacrificed a portion of this key infrastructure financing tool for competing policy priorities.
The 2024 elections delivered the most powerful attack yet on the municipal bond tax-exemption. Public dissatisfaction has converged with the deteriorating US fiscal situation and competing policy priorities from the ‘Red Wave.’ I expect there is a 50% or greater chance that federal lawmakers could eliminate or significantly curtail the tax-exemption due to one or more of these factors during 2025 fiscal policy negotiations.
This threat to America’s infrastructure became imminent at the end of January when The House Committee on Ways and Means (Budget Committee) revealed a list of potential pay-fors, which included a full repeal of the tax-exemption.
In February 2025, House Republicans voted to advance to the next step of the budget reconciliation process. This legislation could be defining for the second Trump administration, Senate Majority Leader John Thune, and Speaker of the House Mike Johnson.
The cost of President Trump’s tax policy priorities ranges from $5 trillion to $11 trillion, according to the Committee for a Responsible Federal Budget. The final tax policy component of this single bill will likely be toward the lower end of that range, but still substantial in size and scope. One key item on lawmakers’ wish list is a potential increase in the state and local government tax (SALT) deduction cap. With rising political support for increasing the SALT deduction cap, this measure could potentially compete with the tax-exemption as a key component of the final bill.
Eliminating this important infrastructure financing tool would raise borrowing costs for state and local governments and public entities by $824 billion over 10 years, which could amount to a $6,555 tax and rate increase for every American household over the same period, according to the Government Finance Officers Association.
The elimination of the municipal bond tax-exemption would also likely exacerbate the infrastructure investment gap, estimated at $2.6 trillion over 10 years per the American Society of Civil Engineers. If infrastructure project financing becomes more expensive for state and local governments and public entities, infrastructure investment could stall or even stop. Smaller entities may fail to finance projects and thus find themselves locked out of the capital markets.
The stakes are incredibly high for American infrastructure. As Congress examines the municipal bond tax-exemption, it is crucial to recognize the profound impact that eliminating or altering this important financing tool would have on the country's ability to meet its infrastructure needs.
This vital tool supports essential public services such as education, clean water, healthcare and transportation, while maintaining the flexibility and effectiveness of state and local governments and public entities in addressing their unique infrastructure challenges. It also plays a crucial role in driving economic growth, creating jobs, and ensuring continued investment in the nation's future.
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