An Obama administration proposal to cap benefits enjoyed by buyers of tax-exempt bonds as part of a broader deficit-reduction strategy could harm the ability of U.S. port authorities to finance new infrastructure projects, experts say.
Tax-exempt bonds are a traditional way for municipalities and states to pay for public works projects and spread the cost over time. Issuers like bonds because they generally have a low interest rate and buyers benefit by not having to pay taxes on the interest they earn. Bonds are also less risky investments because governments are likely to repay their debts. The tax-exemption can save taxpayers 2 percentage points on bonds, making them more attractive securities than taxable bonds, according to the U.S. Conference of Mayors.
Both Democrats and Republicans in Washington have made tax reform one of the key targets for addressing the nation's long-term debt and tax-exempt bonds have come under increasing scrutiny. The White House in its fiscal year 2013 budget request seeks to eliminate or cap the exemption on tax-exempt bonds at the 28 percent tax bracket, instead of 31 percent, as a way to create about $300 million in revenue over the next four years. Part of the reasoning is to close loopholes by which private companies have sold bonds to build a variety of projects with no discernible public benefit, including golf courses, office buildings and retail outlets. Local governments will allow private developers to issue bonds in their name, and lenders will accept lower interest payments because they don't have to pay federal taxes, which essentially amounts to a federal subsidy.
Changing the treatment of tax-exempt bonds could increase borrowing costs for port authorities by about a quarter of a percent and possibly lead to fewer infrastructure developments, Ira Smelkinson, executive director of Morgan Stanley, said during a presentation to the American Association of Port Authorities spring conference last week.
AAPA Executive Director Kurt Nagle on Thursday told members of the House Transportation and Infrastructure Committee during an informal briefing about funding for maritime projects that the proposed change to tax-exempt bonds would increase the cost of projects for ports. - Eric Kulisch