In April, the Trump Administration released a one-page outline of a tax code overhaul that it says will grow the economy, simplify tax filing and lower rates for businesses and middle-income families. The outline does not definitively indicate whether or not municipal bond interest income would be subject to new taxation, though it does promise to eliminate unspecified tax breaks “that mainly benefit the wealthiest taxpayers.”
According to the outline, Trump’s tax reform proposal would consolidate the seven current tax brackets into three, double the standard deduction for individuals and households and eliminate all itemized deductions aside from mortgage interest and charitable giving. The plan would also reduce the business tax rate to 15 percent and eliminate undefined “special interest” tax breaks.
The outline does not make specific reference to interest earned on municipal bonds, which is currently exempt from federal taxation and as a result prompts investors to charge lower interest rates to communities that issue these bonds to pay for water and other infrastructure projects. But the outline’s promise to eliminate tax breaks that mainly benefit the wealthy could be interpreted to include the municipal bond interest exemption, as upper-income households disproportionately buy and hold muni bonds and thus obtain tax-free interest earnings.
In announcing the outline, Trump Administration officials acknowledged that many important details about the ultimate scope of the tax reform plan remain to be filled in. The administration plans to collect input from stakeholder groups and members of Congress over the next month, with the goal of developing a detailed proposal that could go before the House and Senate before the end of the year. Similarly, Republicans in the House of Representatives have been working to develop their own tax reform proposal, the details of which could be made public in the coming weeks.
AMWA has made preserving tax-exempt municipal bond interest a top priority as the tax reform discussions continue, and the association will continue to promote this message in the months ahead.
This information appeared in the May 1 edition of the Association of Metropolitan Water Agencies’ Monday Morning Briefing.
