The Corner

Putting the Muni-Bond Tax Break on the Table

Yesterday, crony hunter Peter Schweizer of the Government Accountability Institute and the Hoover Institution had a good piece in Forbes suggesting that in the process of closing or capping deductions put an end to “tax exemptions for all newly issued municipal bonds, regardless of income.” As he notes, the exemptions encourage the accumulation of debt by local governments, courtesy of taxpayers, which isn’t a good incentive to give to already highly indebted governments. Better yet, these exemptions are yet another example of the unhealthy marriage between the private sector and the government (i.e. cronyism). He explains:

Some municipal bonds are issued for a city’s essential services, such as sewers and roadways, but many others go for non-essential, corporate enterprises. When local governments pick winners and losers, they force others to compete with government-funded cronies financed at lower rates than private companies enjoy—again, a theme Republicans rail against. That injects more corporate cash into local politics, something Democrats speak out against.

If state and local governments had to be more discriminating about which projects to fund with municipal bonds, perhaps they wouldn’t be so keen on green lighting bonds like the one the Poway United District, a subsidiary of the greater School District of San Diego, issued in 2011. Under the guise of a “capital appreciation bond,” the district approved a $105 million bond that will end up costing $982 million by 2051. The reason: payments on the debt are deferred 20 years, dramatically increasing the total cost of the borrowing. That means bondholders score a big return on their investment, but do so on the backs of taxpayers.

At least San Diego’s deal was done in the name of education; many others use taxpayer monies to fund sports stadiums. Indeed, Bloomberg Newsrecently estimated that tax exemptions on interest paid by municipal bonds for sports structures rob roughly $146 million a year from the U.S. Treasury. In a time of serious deficits, this hardly seems wise.

There is more here. The idea has so far been well received on both sides of the political aisle. The question is whether large federal deficits and the current public outrage at cronyism and corporate welfare will be enough to make it happen. As a friend wrote to me this morning, “the local politicians have more chance than the average Joe to prevail with their congressional delegations.” He’s right.

In fact, the same is true of pretty much all costly tax deductions that cripple our tax code. Think about the mortgage-interest deduction, another policy that subsidizes debt. It’s one of the biggest deductions out there, and it certainly benefits high-income earners over low-income ones (and renters). It should go. And yet, because it benefits a lot of special interests who have very substantial incentives to fight its repeal (lenders and-real estate professionals, just to name a couple) it may be the last one to go.

That doesn’t mean we should give up fighting. In fact, this is why we should renew our efforts in denouncing the costly association of government and private interests, and I’m confident that we will prevail in the end. 

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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