INDIANAPOLIS – An obscure provision tucked into the McConnell tax bill governing municipal bonds will make it significantly harder for states and cities to raise money to build new roads and bridges just as Indiana continues to grapple with funding massive infrastructure improvements.
The McConnell bill that Congress just passed prohibits the use of advance refunding for tax-exempt bonds from state and local governments at the end of the year. It’s a procedure that reduces the cost of long-term bonds which bodies like the State of Indiana would likely use to fund major infrastructure projects, including rebuilding crumbling roads and bridges. Instead of paying out rising rates of interest on bonds until the date of maturity – often 20 or 30 years down the line – governments often call in their old bonds instead when rates drop and pay them off by issuing new tax-exempt bonds, which are paid down at the lower interest rate.
The use of advance refunding is widespread and critical for Indiana, as well as many other state and local governments who issue long-term municipal bonds to minimize their debt load and issue new tax-exempt bonds to fund infrastructure projects. The current municipal bond market is worth $3.8 trillion nationwide, and the procedure saves state and local governments billions of dollars a year; the City of South Bend has saved roughly $10 million on its own. Without advance refunding, the use of tax-exempt bonds to fund major infrastructure projects is expected to drop significantly.
While cities like South Bend and states like Indiana will be crippled by the provision’s inclusion in the McConnell tax bill, the federal government’s benefit will be next to nothing. By nixing advance refunding, the federal government will only gain $1.7 billion a year, a drop in the bucket in comparison to the $2.2 trillion this bill may add to the debt over the next ten years. After considering that the projects that rely on tax-exempt municipal bonds are often economic multipliers with a track record of driving up growth and tax revenue, the ultimate revenue increase may even be close to nothing.
“For congressional Republicans’ so-called ‘deficit hawks,’ going after the advance refunding provision won’t raise much money for the government, and for so-called ‘federalists,’ it will move Washington into an even bigger role in infrastructure spending at the states’ expense,” said Will Baskin-Gerwitz, Senior Media Strategist for the Indiana Democratic Party. “Indiana is so desperate to find more money for our state’s crumbling roads and bridges that they’re considering introducing tolling on more of our highways. Did Hoosier Republicans consider asking their counterparts in Washington why advance refunding remained in the McConnell bill instead?”
This release is part of day ten of the Indiana Democrats’ 12 Days of Taxes, a daily series highlighting the problems the McConnell tax bill would create if passed this holiday season. While the McConnell plan would raise taxes on middle class Americans to fund more tax breaks for the wealthy and major corporations, its consequences stretch across American life.