This Dollar Doesn’t Go As Far

Federal tax reform’s negative implications on state infrastructure financing are adding up in Maryland.

At the meeting of the Capital Debt Affordability Committee this week in Annapolis, a presentation by the Office of the Treasure described a few of the negative implications of federal tax reform on Maryland’s ability to finance infrastructure through general obligation bonds.

As described by the Office of the Treasurer:

The 2017 cuts to corporate and individual federal tax rates impacted the cost of
Maryland’s general obligation bond program in a few key ways:

  • Lower tax rates led to decrease in demand for tax avoidance vehicles, including tax-exempt municipal bonds, which contributed to a roughly 50 bps spike in yields for AAA paper at the beginning of 2018
  • Qualified Zone Academy Bond program was eliminated, which will increase the debt service costs of certain school renovation projects
  • Tax exemption for advance refunding bonds was eliminated, which makes it
    more difficult to realize savings on existing debt

All of these changes will increase the cost of the State’s capital program moving

During the debates in Washington, the National Association of Counties and others voiced concerns regarding the implications of  the elimination of tax exemptions on state and municipal borrowing. MACo urged Maryland’s Congressman and advocated to preserve the tax exemption on municipal bonds for similar concerns.

An increase in the cost of financing infrastructure projects means that tax dollars spent on building schools, roads, and other needed infrastructure do not stretch as far. With labor costs also increasing in recent years, additional investment is already required to keep pace and maintain aging public facilities. Putting the two together, each project becomes more costly, at a time when projects are already becoming more costly.

While the final federal tax reform legislation preserved the municipal bond tax exemption, the tax exemption on advanced refinancing bonds was eliminated.

As described by Investment News,

The biggest hit to the muni bond market was the elimination of so-called advanced refunding, which allowed municipalities to issue new tax-free bonds to pay off existing debt.

During the meeting of the Capital Debt Affordability Committee, Comptroller Franchot raised concerns regarding how the elimination of the tax exemption for advanced refinancing bonds might be affecting Maryland counties and other entities.

For more information on Maryland’s debt program, see the complete powerpoint of the Office of the Treasurer and this coverage from Investment News.