OCEAN CITY – The Ocean City Mayor and Council last week approved a measure of support for the preservation of tax-exempt financing.

City Solicitor Guy Ayres presented the Mayor and Council a resolution opposing any efforts by Congress to eliminate or limit the federal tax-exemption on interest earned from municipal bonds.

The resolution states, “Congress is considering many options available to reduce Federal Deficit, and one option Congress is evaluating would reduce or eliminate the exemption on municipal bond interest.”

The federal tax exemption has been in place since the first federal income tax was enacted in 1913, and as a result, state and local governments save, on average, two percentage points on their borrowing to finance investments in public infrastructure. The exemption has generated trillions of dollars of investment in public infrastructure and has saved taxpayers hundreds of billions in interest cost.

Investors in municipal bonds are generally tax-exempt from paying income tax on bond interest payments so even a partial income tax on otherwise tax-exempt interest would cause investors to demand higher returns on their municipal bond investments to make up for the tax they would have to pay.

One proposal being discussed would apply to interest on bonds already issued by governments and purchased by investors.  This would represent a violation of the basic assumption of investors that Congress will not change the terms governing the taxability of interest for bonds already outstanding.

The resolution positions the Town of Ocean City’s in opposition against any efforts by Congress to eliminate or limit the federal tax exemption on interest earned from municipal bonds.

According to Ayres, bonds that are typically tax free allow the town to go into the financial markets and borrow money at least 2 percent lower than the interest rate in the total market that is taxable. The advantage to this is the investor receives a safe investment with a guaranteed rate of return that is not subject to taxation.

The council voted unanimously to approve the resolution.

“When we do issue new bonds if you are a state resident in Maryland the bonds are what they call triple free meaning there is no tax, state, federal or local, so it is an excellent investment in your own community and the rewards of investing in your own community is two-fold, it’s good for the community and its good for you,” said Councilman Brent Ashley, who first broached the topic in May,