Bring on the muni bonds

Fixing Toronto – Part Seven

Municipalities are in dire need of physical regeneration. Yet government budgets are stretched as it is. The capital is there, with a minor change to the tax code that is.

The United States will see US$72 billion of new tax free municipal bonds issued this year, a three fold increase since 1993 (hat tip CNBC). That capital is provided by a resident of a state or city who is prepared to put up capital for a worthwhile local infrastructure project. The attraction for the investor is that they don’t pay tax on the interest income they receive.

Think of the benefit to the investor: a 6% muni infrastructure bond provides true income of 6%, versus a taxable bond which nets little more than 3.2% for folks in the highest tax bracket.

Although I was against the existence of Income Trusts, this seems to be a more sensible approach tax policy. The only “leakage” of tax dollars would be if investors avoided buying a corporate bond. But there are so few corporate bonds being issued as it is, the yields are at historical lows. Not a break that corporations have earned by an improved credit profile, just a reality of a supply/demand mismatch (and incredibly low government bond rates to price against). What’s wrong with fixing that oddity, too?

Not to mention the fact that muni bond capital that goes into new infrastructure projects creates jobs, financed by investors and not our tax rolls. That creates more taxes for governments to receive, potentially filling any loss of taxes from other sectors of the financing market that might lose capital to such a program (loss of revenue is always the argument that finance officials come up with to block new programs, but in this case there is currently no muni bond market to speak of).

This isn’t the first time I’ve made the point, but the time is ripe – even necessary – for Canadian municipalities to access this type of financing. Provided, of course, that any bond issuances are specifically approved via a municipal electorate vote. If our elected officials want to raise $500 million in muni bonds to build a new subway line, put it to a vote. What better way of testing the investors’ appetite for the bond issue to come? We are, after all, taking on the debt ourselves.

Budget consultations are coming. If Toronto’s mayoral candidates get onboard, perhaps we can get the idea into the March 2010 Federal budget.

MRM