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6.1.H. - Page 1 <br /> RE PO RT <br /> To the Honorable Mayor and City Council <br /> From the Cit Mana er <br /> May 20, 2013 <br /> SUBJECT <br /> Council support to oppose cap or eliminate tax-exempt status of municipal bonds <br /> RECOMMENDATION <br /> Approve, by motion, Council support for maintaining federal tax exemptions on income <br /> received from bonds issued by local governments. <br /> BACKGROUND <br /> Several proposals have been circulated at the Federal level that would either eliminate <br /> or cap the tax-exempt status of municipal bonds — i.e. the amount of interest that <br /> purchasers of municipal bonds can exclude from federal income taxes. Senator Barbara <br /> Boxer and other U.S. senators are opposing any proposals to alter the exemption for <br /> interest income received from municipal bonds. Attached is a letter from Senator Boxer <br /> that outlines her position on this proposal. <br /> ANALYSIS <br /> For the last 100 years municipal bonds have been the primary means used by local <br /> communities to build and maintain critical infrastructure such as roads, bridges, libraries <br /> and sewer systems. A unique feature of these bonds is that, for the most part, the <br /> interest income the bondholder receives is excluded from the calculation of the <br /> bondholder's taxable income used in determining their Federal tax liability. As a result <br /> of this exclusion bondholders are willing to accept a lower rate of interest on these <br /> bonds. Accordingly, this provides for lower interest costs for local governments relying <br /> on debt to finance capital improvements. <br /> Proposals that would cap or eliminate tax exempt municipal bonds will make the states <br /> and local communities pay more to finance projects, and could lead to fewer projects <br /> and fewer jobs, and/or the passing of project costs to local tax and rate payers. Three <br /> quarters of all public infrastructure projects in the United States are built by states and <br /> local governments. Tax-exempt bonds are the primary financing tool utilized to satisfy <br /> these infrastructure needs. These proposals attempt to take away low cost capital from <br /> local governments that are already strained financially due the downturn in the <br /> economy, the appropriation cuts over of the last several years, and the recent <br /> sequestration. <br /> Regarding the proposed 28% cap, if the proposal had been in effect during the last 10 <br /> years (2003-2012 period), the League of California Cities estimates that it would have <br /> cost governments an additional $173 billion in interest costs for the $1.65 trillion in <br /> bonds used for state and local infrastructure projects that were completed. Total repeal <br />