Tag Archives: infrastructure

Municipal Bond Tax Exemption Under Review

The Council Development Finance Agencies (CDFA) and Bloomberg News report that the tax exemption for investors in municipal bonds may be abolished as a part of the debt ceiling negotiations.  Lawmakers agreed to preserve the exemption as a part of the fiscal cliff agreement, but it may only be short term.

What would happen to the municipal bond market if the investments became taxable?  The cost of municipal government borrowing would almost certainly go up because investors would suddenly have to pay up to 39.6 percent of earnings on the bonds.

The exemption’s major benefit to municipalities is that it can help them borrow at a lower cost than if they had to borrow through the traditional, taxable market.  The tax free bonds are more attractive to high wealth and high income individuals and entities because they pay higher tax rates.

The municipal bond market is an attractive target for tax increases because of its size at $3.7 trillion.  I haven’t seen a detailed analysis of potential revenue from taxing the market, but it is important to remember that taxes would only come on the earnings in the bond market, not the whole market size.  While borrowing rates are certain to rise in the future, current bond rates are quite low given the interest rate.

President Obama has suggested maintaining the exemption, but capping it at 28 percent – a lower tax bracket.  This would mean that individuals in the highest tax bracket would pay an effective 12.6 percent tax on municipal bonds.  This is not unlike the political strategy with the fiscal cliff.  The increase would affect only the wealthiest investors (who for fairness make up the largest part of the muni bond market since they benefit the most).

A limited exemption for this group is a reasonable policy that might have less of an effect on the cost of borrowing for state and local governments.  Unfortunately, there are only so many ways to raise revenue on the wealthiest Americans, and the increases on them will probably not solve the fiscal situation.  As the federal government has to make more difficult decisions about revenue and spending, the exemption as a whole will probably remain up for discussion.  If the exemption is eliminated, it could significantly dampen the potential for municipalities to renovate, build, and invest in the infrastructure that will help their local economies grow.

For more information on the benefits to state and local governments of the municipal bond exemption, take a look at Municipal Bonds for America.  They are a pro-exemption advocacy group.

Halftime in America

Is manufacturing back in America? The ads from the Superbowl seem to indicate that it is on the rise. General Electric boasted its role in making the country run. Chrysler and Clint Eastwood declared that America had found its way out of a deep hole through returning to building cars.  Putting the political quibbling and controversy aside, are the ads correct?  Is manufacturing back?

The answer is a cautious maybe especially if we rethink what manufacturing means.  The country is unlikely to regain marketshare in manufacturing low cost goods like textiles or furniture.  The country does have the opportunity to build the sustainable future.  The country is going to add somewhere between 50 and 100 million (or more) residents by 2050.  This is going to mean new and more efficient heating, cooling, and plumbing systems and new and rebuilt infrastructure to connect the growing population.  The Institute for a Competitive Inner City suggests that heavy and civil engineering construction will grow 22% and that energy and plumbing systems contracting will grow 29%.  The goal should be to build what gets installed.  The new technologies that will enable efficient energy use will be built (and installed) by high skilled manufacturers.  As the discussion also suggests, we should expand our definition of manufacturing to include installation.

What are the other venues where manufacturing could grow?  Healthcare and medical manufacturing shows promise.  The Research Triangle area in North Carolina has shown that with proper workforce training, biotechnology firms are reluctant to move manufacturing operations out of the area.  Nichola Lowe documents the efforts in a great Economic Development Quarterly article from 2007 titled, “Job Creation and the Knowledge Economy: Lessons From North Carolina’s Life Science Manufacturing Initiative.”

Fuel efficient cars are important too.  The resurgence of the Detroit auto industry is on the back of new and efficient cars.  Standard and Poor’s reported that sales of the fuel efficient (but not hybrid) Ford Focus grew by 60% in 2011!  New hybrid and electric cars will need high quality batteries and advanced components too.

The country is also in an advantageous position to expand manufacturing exports because the relative strength of the dollar is less than it was in 2000.  From 2000 to 2008, the dollar depreciated significantly.  In 2000, a dollar would buy 1.20 euros, by 2008, the same dollar would only buy 0.68 euros.  It has since rebounded slightly to about $1 = 0.75 euros (as of writing).  The dollar losing value makes the goods manufactured in America less expensive and more accessible to other countries, which leads to jobs at home.  What happens with global macroeconomic conditions will influence how many of the new manufacturing jobs the country can capture.

Are we out of the hole and will our manufacturing engines roar?  Again it is a maybe.  The information I presented above shows that the traditional line worker is going to need to learn new skills to be able to build advanced products.  Manufacturers don’t need any old welder, then need precision welders who can accurately piece together airplanes and wind turbines.  Government programs can fill the knowledge gap and get workers ready for the manufacturing jobs of the future like the Research Triangle did.  If we can focus on preparing people for the jobs of the future and not pine for the jobs of the past, then I think our manufacturing engines will roar.