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Between 2000 and 2014, the tax-exempt status of municipal debt saved state and local municipalities an estimated $714 billion, or $80-$120 in additional interest expense per $1,000 borrowed.
This estimate was developed on the behalf of the International City/County Management Association (ICMA) and the Government Finance Officers Association (GFOA) by researchers at the University of Washington Evans School of Public Policy.
The debate about the efficacy of the tax-exempt income status on municipal bonds has a long history, and continues unabated.
Congress is discussing the issue today as part of a larger tax reform initiative. Much of the benefit of municipal bonds is derived from their income tax advantage, and without it the municipal market and existing bondholders could be materially impacted. The whitepaper argues that at the moment there is no robust alternative to the existing system of tax-exempt bond financing. Alternatives such as PAYGO financing and public private partnerships have niche applications, but cannot broadly replace the existing system.
For the time being, the income tax exemption on municipal bonds looks well protected.
Source: ICMA