Government is a bit like physics.
In high school physics you are taught that for every action there must be an equal and opposite reaction. This is also often the case in government.
Take, for example, President Obama’s budget proposal for the 2013 fiscal year unveiled this week.
As part of the proposal, Obama once again called for limiting tax breaks for families with incomes higher than $250,000. Included in his list of targeted tax breaks was those given for purchases of municipal bonds, according to a Reuters report.
To many taxpayers, this probably sounds like a good idea.
Fueled by the revelation that Presidential candidate Mitt Romney paid only a 13.9% tax rate in 2010 despite earning more than $20 million, anger over tax inequity has become a major public issue.
But if approved, Obama’s proposal could have a significant effect on the financing of public infrastructure projects — ranging from bridges and pipelines to parks and libraries, all of which are often financed using municipal bonds.
One of the major benefits of municipal bonds is their tax exempt status. But as Reuters reported, many of the individual investors who purchase municipal bonds often have higher incomes and would likely be affected by the proposed tax break limitations.
In turn, they would probably turn to corporate bonds or other investments that would prove more lucrative. If interest in municipal bonds dropped, this could drive up the costs of borrowing, in turn adding to budget costs for various public projects.
Municipal governments are already facing unprecedented budget crises. Should the federal government really be making it even harder for them to provide important services?