Public Power Daily
Tuesday, March 12, 2013 Past Issues | Subscribe | Printer-Friendly | Advertise | RSS
www.publicpower.org | APPA Online Suppliers Guide

Any change to tax-exempt treatment of municipal bonds would raise costs to public power utilities, says APPA report


Print Print this article | Send to Colleague

 

Each of the proposals to alter the federal tax treatment of municipal bonds that are being discussed in Washington, D.C., would increase borrowing costs for public power providers large and small, according to a report released yesterday by APPA.

"Whether a cap, a limit, or a replacement, every alternative to the current-law tax treatment of municipal bonds would increase financing costs," said APPA President and CEO Mark Crisson. 

The report was prepared for APPA by the BLX Group, a national investment advisory firm to state and local governments. Its methodology was reviewed by Orrick, Herrington & Sutcliffe and Nixon Peabody.

Since the tax code was enacted in 1913, interest on municipal bonds has been exempt from federal tax (just as interest on Treasury bonds is exempt from state and local tax). However, as policymakers look for revenue to finance federal income tax rate cuts or deficit reduction, they have considered a variety of proposals to tax municipal bonds.

The report, entitled, "Tax Reform Proposal Analysis: Impact on Tax-Exempt Bond Financing," finds that various alternatives to tax municipal bonds, either in whole or in part, would increase the all-inclusive cost of new municipal bond issuances by at least 51 basis points and as much as 166 basis points. Relative to current interest rates, that would be at least a 16 percent increase and as much as a 49 percent increase, the report said.

Municipal bonds are used by APPA members to finance power plants, transmission and distribution lines, safety and security facilities, investments in renewable energy sources and conversion to cleaner sources of power generation, among other things.

"Public power providers service 47 million people nationwide," Crisson said. "This report shows that if Congress and the president act to change the tax treatment of municipal bonds, they will have acted to raise rates on these consumers."

The report analyzes the all-inclusive cost under four policy alternatives for a $25 million issuance and a $250 million issuance. The alternatives include:
1) retaining the current-law exclusion;
2) a full repeal of the federal income tax exclusion of municipal bond interest;
3) a surtax on municipal bond interest above a certain income threshold (referred to commonly as a 28 percent cap); and
4) a full tax on municipal bond interest, but with issuers receiving a federal payment equal to 25 percent of the interest paid.

While the median municipal bond issue is $7 million, the researchers used the $25 million and $250 million issues as examples because power-related issues tend to be larger, on average, than other municipal bond issues.

The report noted that in today's economy, interest rates in the bond market are at historical lows. In a more typical high-interest rate market, "the impact of the proposals to restrict or eliminate tax-exempt financing described in this report would be greater," said BLX Group. The report used market data and income tax rates as of Oct. 22, 2012.

The complete report can be found on the APPA website at http://www.publicpower.org/files/PDFs/BLXTaxReformAnalysis012813.pdf. —JEANNINE ANDERSON

 

Copyright © 2014, American Public Power Association

footer