REPEALING TAX-EXEMPTION – Impact on Small and Medium sized Communities

“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” Text of the Sixteenth Amendment, ratified February 3, 1913

This year marks the 100th anniversary of the 16th Amendment legalizing federal income taxation. Importantly, unlike any other deductions, the Revenue Act of 1913 exempted municipal bond income from federal taxation. Lawmakers took this action to help ensure the financial independence of sub-national governments from the federal government remembering Chief Justice John Marshall’s words “the power to tax involves the power to destroy.” (McColloch vs. Maryland, 1819)

One hundred years later, the federal tax-exemption of municipal bond income is seriously threatened by outright repeal or the imposition of a substantive cap, a retroactive tax for certain investors.

We have invested a great deal of time and energy over the last 18 months researching and writing about the critical role the tax-exempt bond market plays in our everyday lives:

– financing low cost, public purpose facilities (schools, village halls, municipal facilities, courts, jails, water plants)
– creating well-paying construction and sustainable service jobs
– providing communities access to private investor capital to finance projects they need, want and are willing to pay for

In December of 2011, we published an extensive white paper on this issue, “Tax Exempt Municipal Bonds-The Case for an Efficient, Low Cost, Job Creating Tax Expenditure

This past week, we released our most recent study on the issue, “Repealing Tax-Exemption-Impact on Small and Medium sized Communities

The report quantifies the increased cost two Illinois issuers incur if the tax-exempt financing mechanism is repealed. Our data is based on actual numbers and market facts; it is not grounded in a multitude of abstractions and assumptions.

The increased financing costs cited in our study represent cost increases these two communities face if they lose their right to issue tax-exempt municipal bonds. The report should serve as a warning for communities across the country.

We ask you to read the report and call with any questions and I would be pleased to discuss the issue with you.

We suggest you call or write your U.S. Congressman, Senator Durbin, Senator Kirk as well as your state legislator and tell them how you feel about this issue.

Ronald P. Bernardi
Bernardi Securities, Inc.
February 14, 2013