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Mayors Seek to Prevent Changes to U.S. Muni-Bond Tax Break

U.S. mayors urged President Barack Obama and Congress not to curb tax breaks given to investors in the $3.7 trillion municipal-bond market, saying it would increase borrowing costs and hurt the economy.

Obama has proposed limiting the value of the tax-exemption given to top-earners. At the beginning of their annual meeting in Washington, the nation’s mayors said they will fight any changes to the tax-treatment of their securities, which could lead investors to demand higher yields.

“It is one of our top priorities,” Philadelphia Mayor Michael Nutter, a Democrat, told reporters today at a news conference. “We need the municipal-bond market to be strong. We need to make sure it’s accessible to as many people as possible.”

State and city officials, and investors, have expressed concern that the pressure in Washington to raise revenue could lead Congress to target the century-old tax break. Local officials rely on the municipal-bond market to raise money for public works projects, such as schools, roads and water systems.

Obama has previously proposed capping the value of tax deductions, including interest from state and local government bonds, for families earning more than $250,000 a year. The proposal hasn’t advanced in Congress and wasn’t part of an agreement passed by Congress that prevented tax increases and spending cuts from kicking in at the start of the year.

Market Drop

The municipal market’s value may drop by $200 billion under Obama’s 28 percent deduction cap for top earners, George Friedlander, a Citigroup Inc. senior municipal strategist, said last month. The bank estimated that investors would demand at least a 0.6 percentage point increase in tax-exempt yields to make up for reduced effective earnings.

Mesa, Arizona, Mayor Scott Smith, a Republican, said Congress may target the municipal-securities tax break as it tries to curb the federal budget deficit. Congress faces deadlines in the next few months over spending cuts, the debt ceiling and the annual budget.

The mayors will fight to protect the tax-exemption, which holds down the cost of public projects that spur local economies, he said.

“It doesn’t create jobs if you’re limiting infrastructure projects,” Smith said. “This is our life blood. It’s not one of the sexiest issues, but it’s one we will continue to hammer.”

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