South Portland City Manager Scott Morelli said the city has two potential projects that would require bonds, including $100 million in needed repairs to facilities that include the vacant Mahoney Middle School. He said the project would cost $32.5 million more without tax exempt bonds. Portland Press Herald file photo

Congress is considering removing tax exemptions on municipal bonds, a move that local officials say would dramatically raise the cost of borrowing money for projects and increase the burden on taxpayers.

Towns and cities have long depended on tax-exempt bonds to fund projects of all kinds, from road and sewer repairs to new schools and public safety buildings. Taxing new bonds would increase borrowing costs by millions for needed projects, according to municipal officials who are pushing to preserve the exemption.

A memo leaked from the House Ways and Means Committee includes the federal tax exemption for state and local bonds in a list of programs that could be modified or eliminated to reduce federal spending. The exemption has been in place since 1913.

“Economic advisers to the Trump administration are describing the repeal as ‘an easy way to save $250 billion,'” Kate Dufour, advocacy and communications director for the Maine Municipal Association, wrote in a recent memo to towns and cities across the state.

Dufour said that the status of the tax exemption has come up several times over the past six months. Removing the exemption would make borrowing for future projects a less viable and more expensive option, though using bonds will still be necessary for towns and cities to do needed work.

“It is cause for alarm,” she said. “We’re talking about some really important projects.”

Nearly $400 billion in municipal bonds were issued across the country in 2023, and by 2031, those bonds are expected to finance another $3 trillion in critical infrastructure, according to the National League of Cities, which is advocating against eliminating or reducing the exemption.

Last year, the Maine Municipal Bond Bank financed several tax-exempt projects totaling nearly $9 million in improvements. Without the tax-exempt status, borrowing costs would increase by 25% to 50%, translating to millions more that taxpayers would pay, Dufour said.

PUSHING BACK

The Maine Municipal Association is calling on local officials to send information about their use of municipal bonds to the state’s congressional delegation to advocate for the exemption.

“The federal delegation doesn’t need convincing, just need to support, to fight for us,” Dufour said.

The Kittery Town Council last week approved a resolution in support of preserving the federal tax exemption and encouraging Maine’s congressional delegation to do the same.

The town has used bonds to build or improve schools, a community center, libraries and other amenities, Chairperson Judy Spiller said before voting in support. The town will soon use a bond to pay for an $8 million field improvement project approved by voters last November.

“On a very basic level, what it means is that Kittery taxpayers will be paying a significant amount more on their property taxes,” Spiller said.

South Portland City Manager Scott Morelli sent a letter to the delegation urging them to oppose any effort to remove the exemption.

“While this may save the federal government some money, those savings will be offset by shifting added costs for needed state and local government projects onto property taxpayers, or worse, causing projects to rise more in expense resulting in their rejection by voters, since most bonding for Maine local governments requires ballot approval,” Morelli wrote.

South Portland has two upcoming projects that will require bonds: The Pearl Street Pump Project, with an estimated $50 million price tag, is needed to prevent aging pumps and equipment from failing and to replace a critical sewer line, Morelli said. Without the tax exemption, that project would increase by as much as $16.3 million.

Morelli said the city has also has identified more than $100 million in needed repairs to city facilities. The project, which would consolidate some facilities into the vacant Mahoney School, has not yet been brought before voters for approval.

“This already expensive project faces an uncertain future, and if we were to bond $100 million without the tax exempt status, it would drive up the price to taxpayers by an estimated $32.5 million,” he said.

In Portland, city staff is aware of the discussions about the tax exemption, but does not see it as a short-term concern, according to spokesperson Jessica Grondin. The city will be issuing just over $20 million in tax-exempt bonds this month.

Removing the exemption would be harmful to municipalities nationwide and Grondin said the city expects to see “major pushback.”

“If it is attempted and passed, the issue would end up in the Supreme Court. We will be working with the Maine Municipal Association, the National League of Cities and our federal delegation to ensure the tax-exempt status of municipal bonds, which is critical to our investment in municipal infrastructure, is maintained,” she said in a statement.

MAINE’S DELEGATION

In Falmouth, municipal bonds have been used recently to build or renovate a police station, three schools and a library, and to fund major improvements along routes 1 and 100, said Town Manager Nathan Poore.

“Municipalities don’t have the fiscal capacity to save up that kind of money to do these large projects,” said Poore, who sent a letter to Sen. Susan Collins, R-Maine, urging her to protect the tax-exempt status.

Falmouth plans to hold a referendum in the next two years for a new public works building and to renovate two fire stations. Poore said the town’s bond agent estimates that the elimination of the tax-exempt status would cause rates to increase around 33%, which would increase repayment costs for the projects by $3.9 million.

Tracy Roy, Lewiston’s finance director, wrote to Sen. Angus King, I-Maine, asking him to advocate for the continuation of the tax exemption. A spokesperson for King said the senator wants the tax exemption kept in place.

Without the exemption, Lewiston would have paid an additional $7.7 million on the nearly $31 million in bonds it has sold over the past five years to fund projects on roads, sidewalks, fire stations, fire trucks and other work, Roy said.

Rep. Chellie Pingree, D-1st District, said repealing the exemption “is just another example of how Republicans will go to any length to pass tax cuts for billionaires and big corporations — and why making people like Donald Trump and Elon Musk even richer is more important to them than investing in our communities.

“Cities and towns rely on municipal bonds to build schools and hospitals, maintain roads, and fund other critical infrastructure projects,” she said in a statement. “Eliminating the tax exemption for these investments will lead to further widening of the existing underfunded ‘infrastructure gap,’ particularly in rural areas less able to seek alternative funding sources.”

Rep. Jared Golden, D-2nd District, said lawmakers “should be focused on middle-class tax cuts, reducing deficits and protecting health care.”

“Those are good goals that can bring people together. Instead, GOP leaders are scrambling for ways to fund trillions of dollars in deficit spending and tax cuts for the wealthy — from cutting Mainers’ health care to nickel-and-diming municipalities for investments they make in infrastructure that Maine families and small businesses need,” he said in a statement. “I’m all for finding smart efficiencies and cutting real waste. This isn’t it.”

Times Record Staff Writer Katie Langley contributed to this report.