Last week, in true Trump fashion, the administration released “the biggest tax cut and the largest tax reform in the history of our country” in all of twelve bullet points on a single sheet of paper.
So, while what the plan says is terrifying—it would overwhelmingly benefit the wealthy—we should also be worried about what it doesn’t say.
In particular, the plan would eliminate “targeted tax breaks” but is explicit about saving two of them: the deductions for mortgages and charitable donations. Some believe that means Congress might eliminate the tax exemption for municipal bonds to pay for tax cuts.
Now, before your eyes glaze over, let me explain municipal bonds and why they’re so important to communities across America.
Have you ever walked by your local public school and wondered, how’d we pay for that? The answer is most likely a municipal bond. State and local governments and other public entities like school districts and water authorities use the bonds to borrow money to build the infrastructure we rely on. Last year, state and local governments issued more than $400 billion of municipal bonds to build roads, water systems, schools, mass transit, parks, and other infrastructure.
What makes municipal bonds so special is their tax-exempt status—the federal government doesn’t tax earnings made by investors that hold them. This allows local governments to pay a lower interest rate compared to private financing.
Congress exempted municipal bonds in 1913 hoping to spur public investment in infrastructure across the country, especially in rural areas. Their bet has paid off: roughly 75% of all U.S. infrastructure was built with municipal bonds.
“People decide to own crucial public goods and services because that means decisions can be made with everyone in mind.”
But there are powerful forces that would like to see the exemption axed. Private equity investors and multinational financial firms are increasingly trying to convince local governments to take their money to build infrastructure. Through public-private partnerships, also known as “P3s,” corporations like Australia’s Macquarie and Spain’s Cintra team together to loan the public cash. They tack on a high-interest rate and often demand to operate and maintain the infrastructure and rake in revenues, like tolls and fees.
The P3 industry is relatively small but they have Trump’s ear. The president tapped DJ Gribbin, a former Macquarie executive who also once worked for Koch Industries, to advise the administration on infrastructure policy. A well-known financial market analyst recently wrote that Gribbin “brings an evangelical passion to his P3 advocacy, which can be beguiling.”
The industry says their money can help local governments build things better, faster, and cheaper, but their track record has been mixed at best. They demand a healthy return—usually charging governments 10–25% interest—making P3s a costly alternative to the 3-4% interest rate that comes with municipal bonds. Most importantly, without strong protections for the public, P3s have the potential to outsource good paying, stable public jobs and give up key aspects of democratic control.
The examples of P3s gone wrong are piling up. In 2008, Chicago sold their parking meters to a Wall Street-led group and quickly discovered they had lost at least $1 billion in the deal. Texas signed a 50-year P3 in 2006 with a private group including Cintra to construct a highway—less than a decade later the road is falling apart and the group filed for bankruptcy. During floods in 2008, Indiana declared a state of emergency and waived tolls on the Indiana Toll Road—the private group running the road, which included Macquarie, charged the state $447,000 for missed tolls.
Despite all the talk about “partnership,” what the P3 industry really wants is control so they can protect their profits. Gribbin once said, beguilingly, “The private sector already owns our gas lines, our electricity, and telecommunications networks. What is it about highways or water that so many people decided that the government has to own it?”
People decide to own crucial public goods and services because that means decisions can be made with everyone in mind.
Democracy is the only way we’ll truly fix the country’s crumbling infrastructure. Rebuilding our roads, bridges, and water pipes will help ensure communities are healthy, safe, and prosperous. Doing it the public way gives us a chance to address widening economic and racial inequality.
Tax-exempt municipal bonds are essential to this investment. They’re as American as apple pie—we have the largest municipal bond market in the world. If Trump really wants to make America great, he shouldn’t touch the exemption.
