Obama Thinks District 200 is Part of the "1%"

President Obama’s proposed budget seeks to raise revenue from School District 200 and every school district, municipality and state around the country that borrows money.  In the name of raising taxes on “upper income” taxpayers, the plan would result in a significant increase in the interest rates District 200 would have to pay on future school bonds.  The plan is unlikely to become law, but demonstrates a profound misunderstanding about the nature of tax exempt bonds.

One reason supposedly "wealthy" people may pay lower tax rates is that they invest in tax exempt municipal bonds, including those issued by District 200.  The President's plan would limit the exemption for interest on those bonds.  This, according to the "General Explanation" of the budget, "would reduce the benefit that high income taxpayers receive from those tax expenditures."

The only problem with this plan is that "rich people" aren't the primary beneficiaries of the existing law.  The "tax expenditure" is a benefit that flows to local school districts, park districts, and community colleges, to cities, and to states.  Because they can issue tax exempt bonds, they - meaning we, the homeowners whose property taxes fund the borrowing - pay lower interest rates on that debt.

For example, as part of District 200's last major borrowing (in 2009), its taxable bonds maturing in 2018 carried a 5.505% interest rate.  But for tax exempt bonds maturing in 2018, it only had to pay 4% to investors.  So the federal tax exemption saved District taxpayers (who pay every penny of interest incurred by the District, through our property taxes), over 1.5% in interest, every year.  If that exemption goes away, investors will no longer be willing to accept lower interest rates to buy these bonds.

The President doesn't want to eliminate the exemption entirely, just to limit it.  So according to one financial analyst, the net effect would be to increase the interest rate for borrowers like District 200 by about 0.8% per year, instead of the full 1.5% or so. Still, that adds up.  According to the Illinois State Board of Education's District financial profile (search here), the District has about $206 million in long term debt.  Not all of that debt is tax exempt, but most of it is, and the added interest cost - and property tax burden on District 200 taxpayers - from the Obama budget would be around $1.5 million per year.  Under present law, the District paid $9,139,200 in bond interest this year (according to the budget), so the proposal would lead to a big increase in that line item, which would not be limited by the property tax cap.

Ironically, while seeking to limit tax benefits on tax exempt bonds, the President wants to bring back the "Build America Bonds" that were part of the 2009 "stimulus" package.  That program paid billions directly to local governments, to allow them to issue taxable bonds.  Tax exempt bonds allow local governments to issue their own debt at a lower interest rate and allow individual buyers to invest in local government projects.  "Build America Bonds" short circuit this process by making local governments, instead, clients of the federal treasury, selling bonds at normal interest rates and waiting for a federal check to make up the difference.  I see no difference in "tax expenditure" here, other than the benefit to Washington D.C. of further centralizing power over what used to be local borrowing decisions.  Maybe that's the point after all.