Rising Debt Service Costs: Public Banks for Tax Relief

Here is a great article by Mike Kraus, one of the founding members of the Public Banking Institute and Chair of Pennsylvania’s Public Banking Project. This was originally published in the Bucks County Courier Times.

By Mike Krauss

Across the United States, states and municipal governments struggle to provide essential public services, such as schools, public safety, courts and prisons, public health, transportation infrastructure and parks, while also trying to keep taxes down for a middle class burdened with taxes of every kind.

Some of those taxes are easily identified, like those on income, wages, property, sales and gas. Some are almost invisible. One of these is the tax on the money raised by the bonds that governments issue to pay for capital projects.

It’s called interest, and this tax shows up in our public budgets and financial reports as “debt service,” which adds to the burden on taxpayers.

In California for example, construction of the new Bay Bridge in San Francisco was projected to cost $6 billion. But California taxpayers are also on the hook for more than $6 billion more in interest, which will be paid to investors who purchased the bonds used to raise the first $6 billion. [Remember the Pima County Bond issue?]

But unlike the actual cost of the bridge which provides a benefit to the people of California, the great majority of the interest paid will leave the state and be of no benefit to its people.

Smaller governments are in the same boat. For example, Bucks County, where this newspaper is published, paid $14 million more in debt service in 2015 than in 2014, principal and interest on its outstanding bonds. The budget just unveiled for 2016 shows another 9 percent increase, a total $42 million, about 10.5 percent of the total budget, at a time of all time low interest rates.

And again, while the money spent on county capital projects has a benefit for the people of the county, almost all the interest paid on the debt (bonds) will leave the county.

One state in the nation has escaped this “double whammy” of taxation: North Dakota, which has its own bank to save taxpayers from the tax on debt.

When North Dakota municipalities or agencies need funds for a capital project, instead of issuing bonds and paying the fees as well as years of interest that siphon money away from the needs of residents, they can get a lower interest loan from the state public bank, the Bank of North Dakota (BND), and lower the debt service. And any interest that is paid comes back to the bank which the people own, to be reinvested in low interest loans to businesses, students and public purposes, or passed through to the state’s general fund as non tax revenue.

Most recently, a BND loan funded a $48 million new school construction, at an interest rate of 1.5 percent. There were no fees to the many parties involved in bond issues, and not a nickel of this interest tax will leave the state.

But a public bank can not only offer low cost loans, it can compete in the bond market with Wall Street and offer lower interest on bonds. A preliminary report prepared for the City of Santa Fe, New Mexico (population 70,000) projects a first year savings of $1.4 million in debt service for a proposed public bank of that city, by refinancing existing debt.

A report of the Political Economy Research Institute at the University of Massachusetts, prepared for state lawmakers in Vermont, projects that a state public bank could save nearly $100 million in the debt service in that state’s annual budget for capital projects.

Public, partnership banks offer many benefits, but none may be as important to taxpayers as lowering the costs of capital projects and eliminating the higher taxes required to meet the debt service on bond issues, and the ability to redirect the flow of interest payments back into the economy of the taxpayers who foot the bill.

A public bank of Bucks County, population almost the same as Vermont and only slightly smaller than North Dakota, could provide this benefit to Bucks County taxpayers. A public bank of Pennsylvania could do the same for our commonwealth.

A network of state, county and municipal pubic banks in the United States could save the American people hundreds of billions a year, reduce debt, generate the affordable credit needed to power our local economies and transform the state, county and municipal budget landscape.

For more information about the exorbitant fees that state, county and city governments are paying to Wall Street, check out  PBI’s What Wall Street Costs American project.

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