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Tax Reform May Cause City Bond Interest Rates Hike, Says City Commissioner

Commissioner Flannery Concerned, Gets Estimates From Financial Expert

May 7, 2006       Leave a Comment
By: Dave Rogers

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New community projects like the main Bay County Library might see interest costs escalate under tax reform proposals issued by a federal panel.

Tax reform at the national level may severely, and negatively, impact financing of local improvements through tax exempt bonds.

Bay City officials are deeply concerned about the effects of the proposals made late last year by a federal panel.

In fact, City Commissioner James Flannery has received an estimate that additional interest could total nearly $3 million on a $6 million, 20-year bond issue like the city's Drinking Water Revolving Loan Fund (DWRF). The interest rate would go from the present 1.625 percent to about 5.75 percent, Flannery was told by a financial expert.

"Apparently there is a movement at the federal level to strip municipalities of their tax-exempt status as it relates to bond financing tax deductibility and tax exemption for housing and economic development," City Manager Robert V. Belleman wrote in his weekly memo to city officials.

State and local officials are concerned about President Bush's proposals to eliminate double taxation of dividends, reduce the capital gains tax on retained earnings and expand tax-favored savings accounts, states the National Center for Policy Analysis (NCPA).

The NCPA's journal states: "These proposals would give most savings the same federal tax treatment now accorded to tax exempt bonds issued by state and local governments. Officials worry that if bonds lost their current tax advantage relative to other assets, they would have to pay higher interest rates on borrowed funds."

The National League of Cities has been following tax reform proposals closely in its publication, Nation's Cities Weekly. An article in the April, 25, 2005 issue, entitled "Local Government Weighs In On Tax Reform," the group states:

"Since the President's announcement, NLC has been following the debate on reforming the nation's taxation system, which may present significant consequences for local taxing authorities and federal taxing centers that specifically impact state and local governments, such as state and local tax deductibility, tax exempt bond financing, an important incentive for housing and economic development."

The article quotes Timothy Firestine, director of finance for Montgomery County, Maryland: "In any tax reform proposal municipal officials must retain the flexibility they need and the diversity of options to collect revenue that will enable them to continue to provide important service."

California State Treasurer Phil Angelides explains: "The Bush plan would open a whole new arena of tax-free investing by eliminating taxes on corporate dividends - essentially putting investments in corporations on a par with investments in schools and clean water.

"The proposal would result in bonds competing with corporations for investors seeking tax-free returns, driving up municipal bond interest rates and, thus, increasing costs to taxpayers. Given the size of the stock market (with over 7,000 publicly traded stocks and a market capitalization of approximately $11 trillion) compared with the size of the municipal bond market ($1.7 trillion in outstanding bonds held), the negative impacts of the Bush proposal on municipal bonds are expected to be significant.

Across the nation, says Mr. Angelides, taxpayers would pay $154.96 billion in increased interest costs over the life of bonds projected to be issued by states and localities over the next 10 years.

California taxpayers would pay $17.21 billion in increased interest costs over thelife of bonds projected to be issued at the state and local level over the next 10 years. The amount of bonds projected to be issued annually is based on the annual average over the last fiveyears.

The final report of the Presidents AdvisoryPanel on Federal Tax Reform was issued last November. Comments are being received from groups and individuals prior to Congressional consideration of the recommendations. The full text of the report is available at

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Dave Rogers

Dave Rogers is a former editorial writer for the Bay City Times and a widely read,
respected journalist/writer in and around Bay City.
(Contact Dave Via Email at

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