Republicans in Congress are considering eliminating a tax break that lowers the cost of public infrastructure projects across the country in an effort to free up money for their chief policy priority: extending 2017 tax cuts that were a windfall for the wealthy.
If incorporated into Republicans’ tax bill, the move would raise the cost of borrowing for state and local governments, school districts and nonprofits, including hospitals like Mayo Clinic.
Matt Fabian, partner at the research firm Municipal Market Analytics, said if governments want to get ahead of potential cost increases for infrastructure projects, they should borrow the money now.
“They should be accelerating their borrowing plans as much as possible,” Fabian said.
Minnesota lawmakers usually pass an infrastructure package, called a “bonding bill,” in even-numbered years. (They pass the two-year state budget in odd years.)
In 2024, partisan negotiations broke down and an infrastructure bill didn’t make it across the finish line, though the Legislature did approve some bond-funded projects on the Iron Range.
The DFL-controlled Legislature passed a $2.6 billion infrastructure package in the 2023 session, including $1.5 billion in bonds, following three legislative sessions without an infrastructure deal. Bonding bills must be approved by 60% of the members of each chamber in order to pass, so they’re usually bipartisan.
A bonding bill isn’t high on the priority list for either party this session, and partisan tensions are running high.
Federal lawmakers are weighing a number of changes to U.S. tax law that would allow them to extend and expand the tax cuts passed during President Donald Trump’s first term. Congressional Republicans plan to use a parliamentary maneuver called “reconciliation” to pass the tax bill with slim majorities in the House and Senate — but they need new revenue to offset the cost of the tax cuts.
One of those potential revenue sources — cited in a House Ways and Means committee document — is to eliminate the income tax exemption for municipal bonds.
Governments and other public entities issue municipal bonds to raise money for big projects. Investors buy the bonds at much lower interest rates than other investments because the income on the bonds isn’t taxed.
If the tax exemption for municipal bond income goes away, bond issuers would face more competition for funding, and interest rates would go up to compensate for the new tax, Fabian said.
In short: Public infrastructure projects would get more expensive, and taxpayers would foot the bill.
Minnesota Housing Commissioner Jennifer Ho recently traveled to Washington, D.C. to meet with U.S. Rep. Tom Emmer, one of the highest-ranking Republicans in the House, in part to lobby in support of the tax exemption for municipal bonds, Ho said Tuesday. Minnesota Housing uses bonds to fund construction projects and housing preservation efforts.
There are a number of other potential downstream effects, too, Fabian said; with municipal bonds competing on the same playing field as hedge funds and other investment funds, investors would have more power when negotiating the terms of a bond, which would create new bureaucratic and logistic hurdles. For example, bond buyers could dictate which revenue streams, like property taxes, must be used to pay back investors, or mandate that the state guarantee bonds issued by smaller entities, like school districts.
Small communities, like local governments and school districts, could lose market access entirely, Fabian said. They would likely have to go through the state to borrow money, which would require state agencies to add staff.
Last month was the biggest-ever January for bond issuance, and market conditions indicate that the cost of borrowing for governments isn’t going down any time soon, regardless of what happens with the taxation of municipal bond income, Fabian said.