Is this the beginning of the end of tax-exempt bond financing by public entities in the United States? Many observers have long suspected that there was a hidden agenda in Washington to remove the tax-exempt status of municipal debt. The regulatory climate in recent months has been anything but friendly towards public finance at the state and local levels. On the one end, the Securities and Exchange Commission and Municipal Securities Rulemaking Board have proposed rules for secondary market disclosure and record keeping that threaten to bring the industry to its knees. Now the other shoe is about to drop with a report by the General Accounting Office.

The GAO report calls for Congress to step up scrutiny of federal tax expenditures and specifically mentions the tax-exempt interest on municipal bonds as an area to examine. The report continues that the Congress has spent a great deal of time carefully watching spending programs but has not scrutinized tax expenditures. Among other recommendations, the GAO suggests that the revenue losses from tax items like "exclusion of interest on state and local government bonds" be listed alongside direct expenditures.

If the subject of all tax expenditures is under scrutiny, it won't be long before the exemptions of state and local government bonds are questioned. If the process is as cavalier and exclusionary as that recently demonstrated by the SEC and MSRB, no one will even question how public entities are supposed to finance roads, schools, and jails. Without the tax preference, taxpayers all across this country will see tax increases as public bond issues compete in the marketplace on the same basis as do all other financings. Already there is too little spread between tax-exempt and taxable issues; the removal of the tax exemption may even tilt the scales in favor of private sector financings, thus closing the door for state and local governments.

An estimated four and a half million taxpayers eamed almost $47 billion in tax-exempt interest in 1992, one of the few tax exemptions remaining, other than interest on their personal residences. Can home mortgage interest exemptions be far behind? The tax-exempt municipal bond has been the mainstay of many individual investment programs, secured by the full faith and credit of the governmental entity, yet paying a respectable yield on investments. Regardless of what may be said, many of these bonds are held by middle-class, middle-income citizens. What effect will the removal of the tax preference have on them, both today and in the future?

It is intriguing to note that while all this is going to dampen the future of state and local government bond financing, and our access to an open and competitive market, President Clinton and Vice President Gore keep posturing about using public pension funds to finance the nation's infrastructure needs. How counterproductive we seem to get.

As time passes, the picture seems to become clear. Those predicting the demise of tax-exempt municipal bonds appear to be psychic. It may come to a vote by your congressional representatives. It might be time to stake them out, before the issue is all but settled.

Harlan E. Boyles is treasurer of North Carolina.

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