Tax-Exempt Municipal Bonds

Preserving a Critical Water Infrastructure Financing Tool

Tax-exempt municipal bonds have been a key tool for financing municipal investments, including water and wastewater infrastructure, since 1913. In 2016 alone, nearly $38 billion in tax-exempt municipal bonds were issued for water and wastewater projects – supporting crucial investments in maintaining infrastructure, building capacity, meeting regulatory requirements and protecting public health and water quality.

During development of the 2017 Tax Cuts and Jobs Act, tax exempt municipal bonds were on the chopping block. NACWA worked with a broad coalition of municipal finance organizations to preserve the tax-exemption and maintain the option of advance refunding. The final version of this massive federal tax reform package, which was signed into law in December 2017, fortunately preserved the 100-year-strong tax-exemption for municipal bonds but unfortunately eliminated the option of advance refunding. A key reason was that eliminating advance refunding “saved” federal dollars based on how legislation is scored, helping pay for other “costs” in the broad package – at the expense of eliminating an important flexibility for communities.

The Association collaborated with the Association of Metropolitan Water Agencies (AMWA) to estimate the value of tax-exempt municipal bonds to water and wastewater infrastructure nationwide and in each state – updating a 2013 joint NACWA - AMWA report on the same topic. The new analysis1 revealed:

  • Communities nationwide issued nearly $38 billion worth of municipal bonds in 2016 to fund investments in drinking water and wastewater infrastructure.
  • Under current laws that exempt municipal bond interest from federal income tax, these issuances are estimated to lead to $63.6 billion worth of debt service costs over 30 years. 
  • If municipal bond interest were fully taxed, these debt service payments would increase to $79.8 billion – an increase of $16 billion, or 25% – significantly increasing costs to ratepayers and constraining further utility investments.

* NOTE: State-specific fact sheets are available for download (bottom), along with a nationwide fact sheet. 

Advance Refunding

Prior to the 2017 Tax Cuts and Jobs Act, one advanced refunding of tax-exempt municipal bonds was permitted. Historical data obtained by NACWA and collaborating organizations found that between 2012 and 2016, there were 941 instances of advance refunding of tax-exempt municipal bonds for water and wastewater infrastructure investments, saving a total of at least $1.36 billion for local communities and ratepayers. Clean water agencies continually evaluated opportunities for advance refunding. This 2017 repeal eliminated opportunities to reduce costs and leverage changes in the market.

What's New

  • In the 116th Congress (2019-2020) NACWA continues collaboration across the municipal financial sector to maintain support for tax exempt municipal bonds – and to restore advance refunding, which was eliminated in 2017.

  • We encourage utilities to share home-state data with your Members of Congress – see state and national fact sheets below – and specific examples of how municipal bond financing and advance funding have reduced financing costs and supported clean water investments in your community.


  • NACWA signs "Don't Mess with Our Bonds" letter to Congress in support of preserving tax-exempt municipal bonds (March 29, 2017).
  • NACWA Members took to the Hill during Water Week 2017 to share their experiences using tax-exempt municipal bonds to finance water and wastewater projects and communicate the importance of preserving financing tools that help make local water projects more affordable.
  •  “Dear Colleague” letter, March 8, 2017, expressing strong support for tax-exempt municipal bonds during Congressional debates on tax reform and infrastructure financing—the letter contained 156 congressional signatures, representing significant support from both political parties. Strong bipartisan support in Congress is crucial to preserving this critical, long-standing financing tool for state and local governments. The letter is addressed to leadership of the federal tax-writing committee – House Ways & Means – and was organized by the bipartisan Municipal Finance Caucus. Thank you to those NACWA members who urged their Representatives to sign this important letter.
  • The 115th Congress and the Trump Administration both identified comprehensive federal tax reform as an agenda priority, along with addressing the infrastructure backlog our nation and local communities face. In prior years, some proposals on tax reform and infrastructure investment from both parties included cutting or eliminating the federal tax-exemption for municipal bonds. NACWA signed the “Municipal Bonds for America” letter to Congress in early 2017, supporting the preservation of tax-exempt municipal bonds.

1     The analysis was conducted by SJ Advisors, LLC.  For simplicity, these estimates were calculated based on the current interest rate environment, and by assuming all bonds were issued for uniform $50 million projects with "AA" credit ratings and 30-year loan maturities. The figures do not include any water infrastructure projects that may have been funded through general obligation bonds.