NEW YORK--(BUSINESS WIRE)--Recently proposed changes to the tax code regarding municipal debt could increase the cost of capital for municipal issuers and limit their financial flexibility, Fitch Ratings says.
Last week President Obama called for a 28% cap on the tax exemption for municipal bond interest for high earners. A tax reform plan released by Rep. Dave Camp (R-Mich.) in the previous week would remove the federal tax subsidy for newly issued private activity and advanced refunding bonds, eliminate the bank qualification for small issuers, and stop the issuance of tax credit bonds. The plan would also make changes to the personal income tax code, including a 25% cap on tax-exempt interest and other revisions.
The proposals could delay some projects, inhibiting economic growth as transportation and other public infrastructure costs mount. According to the Department of Transportation, maintaining roads and transit systems at their current conditions will cost up to $105 billion, while improvements will bring total costs to $146-$171 billion annually through 2030.
Obama's proposal would also put the America Fast Forward (AFF) bonds program into action. AFF bonds would be generally similar to Build America Bonds (BABs) and, as was the case with BABs, may be more popular with larger municipal issuers.
The prospects for either of proposal are uncertain. Fitch will monitor the proceedings and other budgetary negotiations closely.
Additional information is available on www.fitchratings.com.
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