Cities of all sizes rely on tax-exempt municipal bonds as a critical tool to finance infrastructure projects and essential public services. These bonds help fund everything from schools and hospitals to roads and utilities—projects that are vital to the well-being of communities across the country. The tax-exempt bonds issued by state and local governments and nonprofit entities have financed more than three-quarters of our nation’s infrastructure. However, with Congress expected to focus on sunsetting tax provisions next year, the National League of Cities (NLC) anticipates that tax-exempt municipal bonds may be at risk. In collaboration with the Government Finance Officers Association (GFOA), NLC is launching the #BuiltByBonds campaign to undeniably demonstrate the importance of tax-exempt municipal bonds in every congressional district nationwide.
The tax-exempt bonds issued by state and local governments and nonprofit entities have financed more than three-quarters of our nation’s infrastructure.
What Are Tax-Exempt Municipal Bonds?
Tax-exempt municipal bonds were written into the first tax code in 1912 and are a well-established financing tool. They are debt securities issued by state and local governments to fund public projects. These bonds are unique because the interest earned by investors is typically exempt from federal income taxes, and often from state and local taxes as well. This tax-exempt status makes the bonds attractive to investors, allowing governments to borrow at lower interest rates. The savings from these lower rates are passed along to communities, allowing local governments to stretch their dollars further when building and improving critical infrastructure.
By reducing borrowing costs, tax-exempt bonds make it easier for cities and towns to invest in long-term public projects that improve quality of life, spur economic growth and build stronger communities.
Why Are Tax-Exempt Municipal Bonds Important?
For decades, tax-exempt bonds have played a vital role in financing infrastructure projects across the country. They have funded water treatment plants, senior housing, libraries and sidewalk repairs, helping to ensure that local governments can provide high-quality services to their residents without overburdening taxpayers. In 2023 alone, nearly $400 billion in new municipal bonds were issued. If allowed to grow and operate unabated, tax-exempt municipal bonds are expected to finance another $3 trillion in new infrastructure investments by 2031.
One of the greatest benefits of these bonds is that they make large-scale projects financially feasible for smaller governments. Instead of relying solely on limited budgets or raising taxes, municipalities can use tax-exempt bonds to obtain the funds needed for major improvements at a much lower cost.
Why are Tax-Exempt Municipal Bonds Threatened?
Despite the critical role that tax-exempt municipal bonds play, Congress has previously tried to remove their tax-exempt status to help pay for different tax measures or policies. While NLC and partners have successfully stopped each challenge previously, we are concerned that next year’s sunsetting Tax Cut and Jobs Act of 2017 provisions and ballooning national debt will threaten tax-exempt municipal bonds once again.
Introducing the #BuiltByBonds Campaign
In 2023 alone, nearly $400 billion in new municipal bonds were issued.
To address this challenge, NLC and GFOA are launching the #BuiltByBonds campaign, which aims to illustrate the vast impact of tax-exempt municipal bonds in every congressional district and community in America. Showcasing real-world examples of projects funded by tax-exempt bonds and emphasizing their importance to lawmakers will be crucial in their survival.
Local officials can help educate Congress on this issue by populating this map using this form with at least one project that has been partially or fully funded through tax-exempt municipal bonds. The information on the map will allow congressional members and staff to search for projects financed with municipal bonds in their own state and congressional district.
Conclusion
Tax-exempt municipal bonds are an essential part of the infrastructure landscape for local governments. If municipal bonds lose their tax-exempt status, it will lead to higher borrowing costs for cities and less investment in infrastructure.
This is just the beginning. NLC will continue to fight for cities to continue to have access to this crucial funding stream. Stay tuned as we dive into case studies on successful municipal bond projects, guest blogs with external partners, and the release of updated data on the cost savings associated with tax-exempt municipal bonds.
About the Author
Immigration Resource Dashboard: Supporting Cities
Racial Equity Bond Markets Resource Bank
Supreme Court 2024-25 Term Preview: Important Cases for Local Governments
- McKaia Dykema
- Stephanie Martinez-Ruckman
From the Event: Supreme Court Preview for Local Governments 2024-25 Term
Legislation to Simplify Federal Grants on Hold in Congress
- Dante Moreno
Updated Uniform Grants Guidance: How Changes May Impact Your Federal Funds
- Dante Moreno