A group of stakeholders known as the Public Finance Network, which includes several associations representing water utility interests, recently wrote to Congress to urge preservation of the municipal bond tax exemption.
Tax-exempt municipal bonds are a critical financing tool for drinking and clean water agencies and their communities across the country. Citing a GFOA report, the recent Public Finance Network letter noted market data from 2023 showing that tax-exempt municipal bonds reduced state and local borrowing costs by 210 basis points; e.g. from 6.1% to 4%. Elimination of the tax-exemption would correspondingly raise borrowing costs over $823 billion, a cost that would be passed on to American residents and businesses and amounts to an over $6,500 tax and rate increase for every American household and business, the groups wrote.
According to the Association of Metropolitan Water Agencies, part of the Public Finance Network, tax-exempt municipal bonds had been threatened with rollback or elimination in 2025 as Congress considered a major tax reform package. However, no changes were ultimately made to municipal bond tax provisions.
The groups wrote: “We appreciate that Congress recognized that elimination, reduction, or capping of the tax exemption would pose immediate increased costs to the critical projects financed by state and local issuers and preserved this critical local financing tool already this Congress. Added costs to capital projects would force state and local governments to make difficult and pro-recessionary choices and these increased costs would ultimately be borne by the American taxpayer.”
The group noted there is broad bipartisan support in Congress to enhance municipal bonds for state and local governments, proving a powerful, cost-effective tool to drive further investment and economic growth. The Public Finance Network urged members of Congress to join in supporting the following bipartisan provisions:
Restore the Tax-Exemption for Advance Refunding Municipal Bonds: Before Jan. 1, 2018, municipal issuers were able to issue single tax-exempt advance refunding bonds prior to 90 days before call date of the bond. Advance refunding allowed state and local governments to effectively refinance their outstanding debt to take advantage of more favorable interest rate environments or covenant terms. Advance refunding bonds frequently provided issuers with the flexibility to lower debt service charges that would otherwise be a fixed cost.
Support Small Issuers: The Public Finance Network recommends exploring additional ways to enhance smaller communities’ access to capital.
Eliminate Sequestration for Existing Direct-Pay Bonds: While not currently permitted to be issued, in the past, Congress authorized governments to issue taxable direct-pay subsidy bonds. These bonds allowed the government/issuing entity to receive a direct payment from the federal government for the life of the bond, covering a percentage of the interest costs.
Municipal Bonds Issued as Private Activity Bonds (PABs): The collective membership of the Public Finance Network recognizes the critical role of municipal bonds issued as private activity bonds (PABs), with some parts of our coalition exclusively issuing PABs for specific uses, such as housing. These PABs issuers also benefit from infrastructure built around specific-use projects, which is often supported by municipal bonds. The Public Finance Network supports the varieties of financing tools available to communities around the country, including the preservation of PABs.
Several members of the Public Finance Network represent public water/wastewater interests, including AMWA, the American Water Works Association, the American Public Works Association and the National Association of Clean Water Agencies. More information on the PFN can be found at gfoa.org/pfn.
Per AMWA, the Public Finance Network’s letter also called for restoration of advance refunding municipal bonds, which Congress eliminated in 2018. That provision previously allowed state and local governments to effectively refinance outstanding municipal bonds to take advantage of more favorable interest rate environments, and legislation has been introduced in Congress to reinstate that ability. But, congressional leaders have not yet committed to to moving that proposal forward, as it would need to be offset by increased tax revenue or other spending cuts.
AMWA said members who wish to add their voice to ongoing calls to defend tax-exempt municipal bonds can write to their elected officials through its Legislative Action Center.
Source: Public Finance Network, AMWA, GFOA
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