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Call To Action:Protect Municipal BondsCALL TO ACTION:PROTECT MUNICIPAL BONDSWWW.NACO.ORG MAY 2015NACO.ORG APRIL 2014

MAY 2015THE IMPACT OF CHANGINGTHE TAX-EXEMPT STATUS OF MUNICIPAL BONDSMunicipal Bonds: Stay Engaged, Educational Outreach StillNeededDon’t just tell them, show them!One of the best ways to communicate to your members of Congress about the importance of tax-exempt municipal bonds is to invite themand their staff to tour facilities or projects that are funded completely or in part by municipal bondsWe encourage you to reach out to their schedulers to get on their schedules during recess or district work periods. Remember toalso invite the member’s Washington, D.C. staff including the legislative director and chief of staffThese meetings are especially important if your Senator or Representative serves on the Senate Finance Committee or the HouseWays and Means Committee. To see the members of the Senate Finance Committee, click here. For House Ways and Meansmembers, click hereOpportunities to showcase facilities made possible with municipal bonds, meet local business leaders, and talk with employees whowork in the facilities are appreciated by lawmakers and are an effective way to build relationships and begin advocacy effortsDon’t forget to thank them for their time and, if possible, take pictures and write a press release about the visitAny questions on how to engage members? Contact the NACo Legislative Affairs Department at 202.942.4254

MAY 2015THE IMPACT OF CHANGINGTHE TAX-EXEMPT STATUS OF MUNICIPAL BONDSMUNICIPAL BONDS: A CRITICAL ROLE IN LOCALINFRASTRUCTURE, JOBS AND EVERY DAY LIFETax-exempt municipal bonds are the single most important tool that localgovernments use for financing critical infrastructureAny change to the taxation status of often voter-approved debt issued bylocal governments risks:1. Nature of the U.S. federal-state-local partnership2. Slowing economic recovery and investments in vital infrastructure3. Shifting tax burden to local level, especially property tax owners4. Forcing more cuts in local gov’t jobs (i.e. teachers, police,firefighters)Current Market Over 1.5 million municipal bonds outstanding,totaling more than 4 trillion

MAY 2015THE IMPACT OF CHANGINGTHE TAX-EXEMPT STATUS OF MUNICIPAL BONDSTimeline of Proposals to Alter the Tax-Exempt Status of Municipal Bonds20102012 Simpson-Bowles: Proposed elimination of all income tax expenditures; interest earned on state and localmunicipal bonds would be fully taxable for newly-issued tax exempt municipal bonds President’s FY2013 Budget Proposal: Proposed placing a 28 percent limit on the value of specifieddeductions or exclusions from AGI and all itemized deductions; the limit would apply on interest earnedfor new and outstanding state and local tax exempt bonds FY2014 Senate Budget Resolution: Suggested the possibility of a cap being placed on tax expenditures,which could include the exemption for interest earned on state and local municipal bondsMarch2013April2013Feb.2014 President’s FY2014 Budget Proposal: Reiterates 28 percent cap on the value of certain tax benefits,including interest earned on new and outstanding state and local tax exempt bonds Ways and Means Chair Dave Camp (R-Mich.) Tax Reform Draft: Among a host of significant changes toprovisions important to state and local governments, the draft would place a 10 percent surtax on taxexempt interest for high income taxpayers ( 400,000 for single filers, 450,000 for married filers) President’s FY2015 Budget Proposal: Repeats 28 percent cap on the value of certain tax benefits,including interest earned on new and outstanding state and local tax exempt bondsMarch2014 President’s FY2016 Budget Proposal: Repeats 28 percent cap on the value of certain tax benefits,Feb.2015including interest earned on new and outstanding state and local tax exempt bonds

MAY 2015THE IMPACT OF CHANGINGTHE TAX-EXEMPT STATUS OF MUNICIPAL BONDSU.S. SENATE DEVELOPMENTS114th CongressSenate Finance Committee in the 114th: With the start of the new GOP-controlled Senate, Sen. Orrin Hatch (Utah) takes thegavel of the committee and has expressed early optimism for tax reform. Soon after the year began, Chairman Hatch andRanking Member Ron Wyden (Ore.) launched bipartisan tax reform working groups. Each group is responsible for lookinginto the areas of: Individual Income Tax, Business Income Tax, Savings and Investment, International Tax and CommunityDevelopment and Infrastructure. Recommendations based on public input received by the working groups are expected inlate Spring113th CongressSenate Finance Committee Shuffle: After Sen. Baucus (D-Mont.) retired to become the next U.S. Ambassador to China, Sen.Ron Wyden became the Finance Committee Chair. Sen. Wyden has maintained support for comprehensive tax reform,putting forth his own proposal in the 112th Congress. The plan called for the repeal of the exemption for municipal bondinterest and converting it to a tax creditSenate Finance Committee Working on Tax Reform: The Senate Finance Committee, led by Chairman Max Baucus andRanking Member Orrin Hatch, met on a weekly basis through the spring and summer of 2013 to discuss option papers for taxreform. They also completed their “blank slate” exercise where Senators were encouraged to submit provisions that shouldbe included in a reformed tax code. Less than half of the chamber submitted specific proposals, signaling that many are stillnot ready to put their favored tax preferences in writingSen. Begich (D-Alaska) Letter to President Obama: Sen. Begich circulated a letter in the Senate urging the Administration toprotect the tax-exempt status of municipal bonds in the ongoing debt and deficit negotiations. Fourteen Senators signed onand the letter was sent in early April 2013

MAY 2015THE IMPACT OF CHANGINGTHE TAX-EXEMPT STATUS OF MUNICIPAL BONDSU.S. SENATE DEVELOPMENTS113th Congress (cont.)Major Coalition Letter to Senate Leaders: NACo/NLC/USCM led a major coalition on a letter to Senate leaders urging them toprotect municipal bonds as they considered the FY2014 Budget Resolution. Nearly 60 major groups signed onFY2014 Senate Budget Resolution: The Senate Budget Resolution, passed by a vote of 50-49, suggested the possibility of acap being placed on tax expenditures – which could include the exemption for interest earned on municipal bonds. Thislanguage could support either a 28 percent cap (as proposed by the Obama Administration) or total elimination (as proposedby the Simpson-Bowles Commission) of tax-exempt financingImpact: If a 28-percent benefit cap on tax-exempt interest had been in effect during 2003-2012, it is estimated thatthis would have cost states and localities an additional 173 billion in interest expense for infrastructure projectsfinanced over the past ten-year period

MAY 2015THE IMPACT OF CHANGINGTHE TAX-EXEMPT STATUS OF MUNICIPAL BONDSU.S. HOUSE OF REPRESENTATIVES DEVELOPMENTS114th CongressOnce again, Reps. Ruppersberger and Hultgren Lead Letter to House Leadership Urging Preservation ofTax-Exempt Status of Municipal Bonds: Reps. Dutch Ruppersberger (D-Md.) and Randy Hultgren (R-Ill.)circulated a “Dear Colleague” letter to House Leadership that urges preserving the tax-exempt status ofmunicipal bonds. 124 Representatives signed on in support of municipal bondsHouse Ways and Means Committee: With the start of the new Congress, Rep. Paul Ryan (R-Wis.) took thegavel of the powerful tax writing committee. Chairman Ryan has supported an overhaul of the tax code buthis plans to do so remain uncertain, more specifically, it remains to be seen how much of the blueprint thatformer Ways and Means Chair Dave Camp (R-Mich.) released in 2014 will be reused113th CongressTax reform discussion draft: Ways and Means Chairman Camp released his discussion draft on tax reform inFebruary 2014, he received little to no support from House leadership on moving forward with the draft.The plan would: impose a 10 percent surtax on municipal bond interest income for high-income households,eliminate the deduction for state and local taxes, repeal private activity bondsHouse Action: Ways and Means Republicans met with Chairman Camp throughout the fall of 2013; budgetnegotiations at the end of 2013 failed to produce a “grand bargain” which could have included tax andentitlement reform

MAY 2015THE IMPACT OF CHANGINGTHE TAX-EXEMPT STATUS OF MUNICIPAL BONDSU.S. HOUSE OF REPRESENTATIVES DEVELOPMENTS113th Congress (cont.)Reps. Terry and Neal Lead House Resolution to Support Muni Bonds: H.Res.112, introduced March 2013 byReps. Lee Terry (R-Neb.) and Richard Neal (D-Mass.), celebrates the importance of municipal bonds; over100 Representatives signed on as cosponsorsReps. Ruppersberger and Hultgren Lead Letter to House Leadership Urging Preservation of Tax-ExemptStatus of Municipal Bonds: Reps. Dutch Ruppersberger (D-Md.) and Randy Hultgren (R-Ill.) circulated a“Dear Colleague” letter to House Leadership that urges preserving the tax-exempt status of municipalbonds. 138 Representatives signed on in support of municipal bondsHouse Ways and Means Committee Established Working Groups to Tackle Tax Reform: 11 working groupsgathered stakeholder feedback and data on topics related to tax reform, then submitted the information tothe Joint Committee on Taxation, who compiled the findings in a report to Ways and Means Committee. Thereport was released on May 6, 2013House Ways and Means Committee Hearing on Tax Reform: Hearing held March 19, 2013, “Tax Reform andTax Provisions Affecting State and Local Government,” primary topic of discussion was tax-exempt municipalbonds

MAY 2015THE IMPACT OF CHANGINGTHE TAX-EXEMPT STATUS OF MUNICIPAL BONDSADMINISTRATION UPDATEPresident Obama’s FY2016 Budget Request: Similar to FY2013, FY2014 and FY2015requests, includes 28 percent cap on the value of certain tax benefits, including taxexempt interest on municipal bondsCap represents a partial tax on otherwise tax-exempt bond interest and would apply totaxpayers in the 33, 35, and 39.6 percent tax bracketsCap would apply to outstanding as well as new bonds, beginning in 2016In addition to tax-exempt interest, the cap would also apply to itemized deductions andcertain other tax preferencesProposes new bond program intended to spur private involvement in publicinfrastructure projects by expanding the use of private activity bonds (PABs) beyond whatis currently allowed by the tax codeContinue to Engage in Debt and Deficit Negotiations

MAY 2015THE IMPACT OF CHANGINGTHE TAX-EXEMPT STATUS OF MUNICIPAL BONDSTOP 10 U.S. INFRASTRUCTURE PURPOSES FOR MUNI BONDS2003-2012Source: Thomson-Reuters data, February 2013

MAY 2015THE IMPACT OF CHANGINGTHE TAX-EXEMPT STATUS OF MUNICIPAL BONDSSource: Thomson-Reuters data, February 2013

MAY 2015THE IMPACT OF CHANGINGTHE TAX-EXEMPT STATUS OF MUNICIPAL BONDS Tax-exempt municipal bonds are the most important tool in the U.S. for financing investmentin schools, roads, water and sewer systems, airports, bridges and other vital infrastructure.State and local governments financed more than 1.65 trillion of infrastructure investmentduring 2003-2012 through the tax-exempt bond marketNinety (90) percent of infrastructure muni-bonds financing went to schools, hospitals, water,sewer facilities, public power utilities, roads and mass transit over that 10 year period.During that decade, 514 billion of primary and secondary schools were built with financingfrom tax exempt bonds, nearly 288 billion of financing went to general acute-care hospitals,nearly 258 billion to water and sewer facilities, nearly 147 billion to public power projects, 105.6 billion to mass transit and nearly 178 billion to roads, highways and streetsIn 2012 alone, more than 6,600 tax-exempt municipal bonds financed more than 179 billionworth of infrastructure projectsState and local governments finance small and large infrastructure projects with munibonds. In 2012, the average municipal bond issuance varied from 338 million for bridges to 2.2 million for fire stations and equipment

MAY 2015THE IMPACT OF CHANGINGTHE TAX-EXEMPT STATUS OF MUNICIPAL BONDSSource: SIFMA estimates based on Thomson-Reuters data using the report’s assumptions

MAY 2015THE IMPACT OF CHANGINGTHE TAX-EXEMPT STATUS OF MUNICIPAL BONDSBetween 2003 and 2012, counties, states and otherlocalities invested 2.5 times more than the federalgovernment in infrastructure. Reiterates the point thatthere is no federal program that can replicate the resultsmunicipal bonds have producedChanges to the tax exemption for municipal bond interestwill affect all Americans. American households holdalmost three-quarters of the municipal bond market – capor repeal would affect Americans’ retirement nests, at thesame time the higher debt service would impact state andlocal government budgets and ultimately, taxpayers.In 2012 alone, the debt service budget for countieswould have risen by 9 billion if repeal was in place overthe 15 years, 3.2 billion if a 28 percent cap were in placeMunicipal bonds are safe investments and are issuedthrough a well-established, ground-up approval system.Municipal bonds of all levels of Moody’s credit ratings hadlower default rates than corporate bonds from 1970 –2012

MAY 2015THE IMPACT OF CHANGINGTHE TAX-EXEMPT STATUS OF MUNICIPAL BONDSADDITIONAL RESOURCESNACo report on the impact to counties of proposed changesNACo municipal bond resource pageLegislative fact sheet on municipal bondsJoint NACo/USCM/NLC report on the impact of municipal bonds

MAY 2015THE IMPACT OF CHANGINGTHE TAX-EXEMPT STATUS OF MUNICIPAL BONDSContact Us!For questions or more information, feel free to contact us belowDeborah Cox, NACo Legislative Director202.942.4286 or [email protected] Belarmino, Associate Legislative Director202.942.4254 or [email protected]

25 Massachusetts Avenue, N.W. Suite 500Washington, D.C. 20001202.393.6226www.naco.org

CALL TO ACTION: PROTECT MUNICIPAL BONDS NACO.ORG APRIL 2014 Call To Action: Protect Municipal Bonds WWW.NACO.ORG MAY 2015 . MAY 2015 . municipal bonds would be fully taxable for newly-issued tax exempt municipal bonds 2012 President’s FY2013 Budget Proposal: Proposed