Ask a room of finance officers what the federal tax exemption on investors’ municipal bond earnings is worth to their state or local government and you will get a version of the same answer: a lot. Ask what it is exactly worth in dollars, on their last issuance and over the life of that debt, and the room will probably go quiet.
That gap is easy to live with right now because the immediate congressional pressure to repeal the exemption has eased. The people who lobby hardest to protect it say the threat is cooler today than at any point in two years. But the exemption is never permanently safe, and the best time to understand what it is worth to a government is before the next fight, not during it.
Here is how the last fight went. In early 2025, a leaked House Ways and Means Committee list of revenue options included repealing the exemption, scored at roughly $250 billion in increased federal revenue over 10 years. A coalition led by the Government Finance Officers Association (GFOA), the National League of Cities, the National Association of Counties and the U.S. Conference of Mayors mounted a monthslong campaign, and when the One Big Beautiful Bill Act (OBBBA) was signed in July 2025 the exemption was left fully intact, for both governmental-purpose and private activity bonds.
The reason efforts to repeal it will return is structural. The exemption is large, old and easy to score as a federal revenue-raiser, which makes it a standing target whenever Congress hunts for offsets. As Tom Kozlik of HilltopSecurities has argued, the very law that spared it may have raised the longer-term risk by deepening the federal deficit. Within weeks of OBBBA’s passage, a conservative think tank, the Economic Policy Innovation Center, circulated a memo that again listed repeal among its options, and when The Bond Buyer surveyed municipal finance professionals this spring, the prior year’s fight still ranked among their leading concerns. The idea does not disappear. It goes back on the shelf.
The 2025 fight also revealed which arguments move federal policymakers. One approach, from the University of Chicago’s Center for Municipal Finance, quantified what the exemption builds, congressional district by district — the roads, schools, hospitals and water systems financed with tax-exempt debt.
Another approach reframed repeal as a tax increase on constituents: more than $6,500 per household over the decade, by the estimate of the Public Finance Network, the issuer coalition GFOA administers. That framing is contestable, since it assumes governments would keep borrowing at the same pace rather than scaling back. But it landed with policymakers in a way that appeals to government budgets had not. The lesson is that the case for the exemption is made in terms of what it builds and who pays if it goes away.
Different Issuers, Different Stakes
It is tempting to say the benefits flow mainly to large, frequent issuers, and in pure dollar terms that does capture the most measurable savings. But that misses what is at stake for everyone else. Different issuers realize different kinds of benefit, and the smaller the issuer, the more existential it becomes.
For a large issuer, the exemption is a discount on borrowing costs. For a small, infrequent one, it is the door to essential public works that might otherwise be unobtainable. As Justin Marlowe, a public finance scholar at the University of Chicago, put it to me, “The real value to smaller, infrequent issuers is that the market is there for them when they need it.” If the municipal market went taxable, most of the buyers who would replace today’s tax-exempt investors — pension funds, corporate balance sheets, foreign central banks — would rarely look at deals below roughly $250 million. That threshold prices out the vast majority of American governments. A small city would not simply pay a higher rate; it could lose reliable access to the public debt market altogether and be thrown back on more expensive local commercial banks, state programs and thinner sources of capital.
So both ends of the market have something real to lose, denominated in different currencies: the large issuer in interest-rate basis points, the small issuer in access to capital itself. Both have the same obligation, which is to measure it.
That presents something of a moving target. A government’s own borrowing costs tend to be fairly stable and predictable, but the value of the exemption layered on top of them moves with the market. It rises and falls with the ratio of tax-exempt to taxable yields, with Treasury volatility and with new-issue supply. It is worth more in high-tax states such as California and New York, and it prices differently for general obligation debt than for revenue bonds.
This is where the policy fight and the management task converge, and where my own research points. In work with colleagues on how institutional fiscal constraints shape municipal credit ratings, and in later work on how fiscal rules drive borrowing costs and debt levels, one finding recurs: Borrowing costs are structural. They reflect the rules a government operates under, the frequency of its market access and the balance sheet it brings — not merely prevailing rates.
Know Your Own Number
All of which argues for a specific exercise rather than merely a watchful eye on Congress: Quantify your own government’s position before the threat returns.
For any issuer, that means estimating the spread between what you paid on your most recent tax-exempt issuance and what a comparable taxable deal would have cost, over the life of the debt — recognizing that the figure moves with the market and is worth re-computing, not booking once. For large, frequent issuers, the next step is translating that number into the terms that move a policy debate: what that debt builds and what its loss would cost constituents. For small and infrequent issuers, the harder question is not the rate at all. It is whether the market would be there without the exemption, and what you would rely on if it were not — a question worth answering before the answer is forced.
The exemption survived 2025 in part because governments could show, concretely, what its loss would cost them — some in dollars, others in capital access itself. The pressure has cooled, not vanished, and it will be back. Knowing what the exemption is worth to your own government is the first and most durable form of protecting it.
Governing‘s opinion columns reflect the views of their authors and not necessarily those of Governing‘s editors or management.