WASHINGTON, June 24 Limiting the tax exemption
for the interest paid by U.S. municipal bonds would not only
make borrowing more expensive for cities, counties and states,
but would also drag on economic growth while driving up
unemployment, according to a study released by the U.S.
Conference of Mayors on Monday.
As part of his push to limit tax benefits for top earners
and raise revenue, President Barack Obama in his budget in April
suggested capping the rate at which high-income taxpayers can
reduce their tax liability at 28 percent.
If approved, the cap would essentially drive down the appeal
of municipal bonds, which are often sold to wealthy investors
willing to accept lower interest rates because of the tax
Mayors from across the country have warned the diminished
demand could in turn push up borrowing costs and force them to
cut back on infrastructure projects that require financing. They
estimated recently states and localities would have had to pay
$173 billion more in interest expenses over the last decade if
the cap had been in place.
Reduced capital works, in turn, would slow year-over-year
job growth by 20 basis points, according to the study, which the
mayors' group commissioned from IHS Global Insight.
For example, in 2012, the unemployment rate would have been
8.3 percent instead of 8.1 percent, the study found.
Construction would have had about 122,370 fewer jobs, and in
total the economy would have lost 311,736 jobs when sectors such
as business services, trade and transportation, and financial
services are considered.
Under the cap, real gross domestic product would have been
$24.7 billion or 0.2 percent lower that year, the study found.
That could create a hiccup in the economy's recovery from
the 2007-09 recession. After the end of the 2009 economic
stimulus plan, state and local spending fell so low that it
pulled down the country's GDP and led to major job losses. As
the spending picked up recently, the economy has improved.
"State and local governments who have been a major drag are
now coming to a position where they no longer have to lay off
large numbers of workers," said Federal Reserve Chairman Ben
Bernanke last week when discussing parts of the economy that
"look a little better" and could lead the central bank to pull
back its monetary stimulus.
The fate of the tax cap proposal is uncertain. Obama has
repeatedly suggested it for three years and the idea has rattled
the municipal bond market. But many lawmakers from both parties
and both chambers of Congress have advocated for preserving the
exemption for municipal bond interest as a way to promote
infrastructure spending while protecting tax-free income for
Groups such as the National Association of State Treasurers
are closely following tax reform negotiations in Congress,
saying the cap could still be included in a package to overhaul
the U.S. tax system which Congress is working to pass by the end
of the year.