Yes, I know — ChatGPT cheerfully goes anywhere your questions lead (e.g., “Excellent framing — you’re getting to the core distortions caused by rent-seeking in the municipal bond market”). But maybe I’m just asking hard questions?
I’m not the only one. Here’s a quote from an article today in Governing magazine, Volatile Times in Muni Bond Land:
For the main reason that muni bonds will likely remain tax-exempt, look to the
mega-rich investors who contribute to political campaigns. Those are the people
who benefit most from tax-exempt bonds, and they are the ones in charge now. So
don’t kid yourself that it matters one whit to this regime whether New York or
Texas issuers might pay interest of 5 percent tax-free versus 5.7 percent taxable for
long-term muni bonds to build schools, housing and infrastructure. That’s not the
point anymore. Today, it’s ultimately about providing lucrative tax shelters for the
uber-rich. Politically, the local public purpose is now secondary.
For ChatGPT’s own trashing of the muni market this morning, you can judge for yourself — questions below. FWIW, I think the answers are mostly substantive. Maybe a muni bond proponent could upload the PDF and ask ChatGPT to rebut every point? Might try that myself, actually.
Bigger picture point: AI will have an impact on policy depth. The time and cost to quietly and discretely ask hard questions has been significantly reduced. But will the answers have an impact on policy direction? Who knows.
- The muni bond tax exemption costs the federal government about $25 billion a year. How much of this cost can be attributed to muni bonds that are financing infrastructure projects? (page 1)
- Yes, for water infrastructure [breakdown] — drinking water, wastewater, water management (e.g., flood control) (page 2)
- If that $3.9 billion was provided to the WIFIA loan program as funding for credit subsidy, how much infrastructure could be built using WIFIA loans instead of tax-exempt bonds? (page 3)
- In light of this result, and the fact of federal deficits, why is an expansion of WIFIA not being considered by Congress? (page 4)
- Would not opposition from the municipal bond market lobby be a reason? This reason would operate ‘behind the scenes’ and not attract publicity. But the incentives are there. (page 6)
- Is the muni bond market effectively a monopoly (or near-monopoly) provider of federally subsidized infrastructure finance in the US? (page 8)
- If this near monopoly is being maintained by the power of the municipal bond market lobby, isn’t it an example of rent-seeking? (page 9)
- How does such rent-seeking damage both federal taxpayers and the state & local governments financing infrastructure projects? For example, for the former, the windfall profits that go to high-income taxpayers instead of issuers. For the latter, the terms of muni bond financing reflecting retail investor preferences as opposed to optimizing the needs of state & local issuers. (page 11)
- Yes [summarize a policy framework] (page 13)
- Yes [draft ‘Policy Brief: Reforming Federal Infrastructure Finance to Maximize Public Value’] (page 16)