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Preserving Muni-Bond Tax Exemption Is New Group’s Goal

Dealers and debt issuers in the $3.7 trillion municipal market are fighting to protect tax exemptions for interest paid on state and local bonds following proposals in Washington to pare back or end the benefit.

A new alliance, called Municipal Bonds for America, seeks to preserve the federal tax break for investors, enacted in 1913, according to the Washington-based group. It says canceling or scaling back the exemption would lift public borrowing costs.

“You’re hurting anybody that gets a water bill, because you’re going to raise the cost of capital and make munis less attractive,” said Mike Nicholas, the chief executive officer of the Bond Dealers of America who helped organize the new group. “Whether you’re making $20,000 a year or $500,000 a year, your bill is going to get bigger. Those are dots that don’t get connected by people on Capitol Hill.”

The group formed to fend off proposals to curb the tax break or end it such as those from President Barack Obama and Oregon Senator Ron Wyden, both Democrats. Governments, public utilities, transit agencies and nonprofits such as hospitals and universities borrow in the U.S. muni market partly by offering tax-exempt securities. Their debt usually yields less than similarly rated taxable corporate bonds, lowering costs for the issuers and the taxpayers and customers they serve.

Republican presidential nominee Mitt Romney, a former Massachusetts governor, has proposed limits on tax exemptions to help curb U.S. budget deficits, without offering specifics.

$2.2 Trillion Need

State and local governments around the U.S. need to spend $2.2 trillion to put the nation’s infrastructure in good condition, according to a 2009 report from the American Society of Civil Engineers that reflected the effects of the longest recession since the 1930s. The cost rose about 37 percent from 2005. The Reston, Virginia-based group plans an update in 2013.

“Given the growing need to replace aging infrastructure and renew economic growth, it is now more important than ever to make certain that local and state governments continue to have access to reasonably priced funding,” said Marty Vogtsberger, a co-chairman of the alliance, in a prepared statement. He leads institutional brokerage operations for Cincinnati-based Fifth Third Bancorp’s broker-dealer subsidiary.

“Policy makers should not try to fix what isn’t broken; a tax on tax-exempt bonds ultimately shifts more burdens to local governments,” said Ken Williams, also a co-chairman of the group, in the statement. He is the San Francisco-based chief executive officer of Stifel Nicolaus & Co., a investment bank and brokerage unit of Stifel Financial Corp.

Leaders of issuers such as the New York City Housing Development Corp. and American Municipal Power Inc. in Columbus, Ohio, are also members of the alliance. The Bond Dealers organization, headed by Nicholas and based in Washington, isn’t a member of the group.

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