A Reminder that the Time for Local Community Investment is Now

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This post was written by Carolyn Coleman, Director, Center for Federal Relations at the National League of Cities.

This is the fourth post in a series this week discussing different perspectives on the results of NLC’s 2013 Local Economic Conditions Survey.

At a time when our recent Local Economic Conditions survey report shows that cities are still struggling in significant ways and growth is not keeping pace at a level needed for a sustained recovery, our federal partners should be supporting investments in local communities, not entertaining proposals to harm them.

So far that has not been the case.

Over the last 18 months, the federal government has lurched from one fiscal cliff to the next. For example, on March 1, as a result of Congress’s failure to avert them, the $85 billion in mandatory across the board spending cuts known as “sequestration” went into effect for FY 2013.

Among other cuts, over the course of the year this will amount to a 7.8 percent cut in non-exempt defense spending and a 5 percent cut in non-defense discretionary spending, which will impact many programs including, among others, the Community Development Block Grant program, Section 8 housing assistance, public safety, education, job training, and water infrastructure.

Everyone agrees that these cuts will be harmful to the economy, to communities, and to individuals across the country. Then, on March 26, President Obama acted just in time to avoid a federal government shutdown the next day by signing a stop-gap spending measure.

FY14 Budget
With the FY 2013 process behind them, over the last several weeks, the focus in Washington has shifted to the budget process for FY 2014, which starts on October 1, 2013.  It began with the House and Senate passing budget resolutions several weeks ago.  While these resolutions are non-binding, they do provide a preview of the priorities for the leadership of the two chambers and their differences.

Then earlier this week, President Obama introduced his FY 2014 budget proposal. For cities, while there was good news, it isn’t necessarily outweighed by the bad.  For the last several months, NLC and city leaders across the country have been educating the White House as well as House and Senate members about the value of tax-exempt municipal bonds and the need to preserve this long-standing partnership between the federal government and local governments, which has been in effect since the federal income tax was first instituted in 1913. (See letters and resolutions.)

Municipal Bonds Under Attack
Tax exempt municipal bonds are the most important tool in the country for financing investments in schools, roads, water and sewer systems, airports, bridges, and other vital infrastructure.  According to a recent report issued by NLC, the U.S. Conference of Mayors (USCM) and the National Association of Counties (NACo), over the last decade alone, state and local governments financed more than $1.65 trillion of infrastructure investment through the tax exempt market.

Limiting the exemption or eliminating it would significantly increase the borrowing costs for our communities or mean fewer resources for these essential infrastructure systems. In NLC’s Local Economic Conditions survey, we ask city officials how they anticipate the impact of a federal limitation on the municipal bond tax exemption. Sixty-one percent report they would limit the number of projects undertaken; 54 percent report they would reduce the scope.

For these reasons, we were disappointed and frustrated when we learned that the President’s budget kept the door open on limiting the exemption by proposing a 28 percent cap on income tax deductions.  While the President’s budget did include new resources for infrastructure investments, like America Fast Forward bonds, a national infrastructure bank, and $50 billion in immediate infrastructure investment, these new tools are no substitute for the tax exempt municipal bond tool.

According to NLC-USCM-NACo report, if the proposed 28 percent cap had been in effect during the last decade, the borrowing costs to state and local governments would have increased by $173 billion and would have prevented many infrastructure projects from going forward.

It’s also important to note that the President’s budget is not the only one that keeps the door open to changes to the tax exemption in order to reduce the federal deficit or fund new programs.  Both the House and Senate budget resolutions also leave open the possibility of limiting the exemption for municipal bonds.

While we recognize that a balanced approach is necessary for the federal government to get its fiscal house in order, Washington should be supporting municipal bonds, not entertaining proposals to harm them or our communities.  That will be NLC’s message as the FY 2014 budget process moves forward.