Municipal leaders warn that the biggest threat to America’s infrastructure boom may no longer be materials or labor, but money.
When Congress decides to get back to work, the debate over taxing interest on municipal bonds could resurface, with cities warning that the loss of long-standing tax breaks could choke off the low-cost borrowing that supports billions of dollars in local construction.
According to the National League of Cities’ Municipal Infrastructure Conditions 2025 report, 46% of municipalities rely on bonds to finance capital projects, while 84% already say their budgets cannot meet current needs.
“Cities are demonstrating resilience in the face of uncertainty, but the financial and procedural hurdles they face threaten to dampen the impact of historic federal investments,” wrote NLC CEO Clarence E. Anthony.
Debt at risk
The report identifies $4.2 trillion in outstanding municipal bonds and loans as “another prominent financing channel … that allows issuing cities, towns and villages to meet needs that exceed their current budget capacity.”
He warns that if federal tax-exempt status were revoked, “municipalities would face significantly higher borrowing costs, which could delay or reduce the scope of infrastructure projects.”
Market data shows the scale of exposure. The Securities and Financial Markets Industry Association (SIFMA) reports $4.3 trillion in US municipal bonds outstanding as of the second quarter of 2025, with $434 billion issued through September, up nearly 12% from a year earlier.
“These bonds are the backbone of local infrastructure financing,” Kenneth E. Bentsen Jr., president of SIFMA, said in an October 2025 interview with The Bond Buyer. “We will certainly advocate for maintaining the tax-exempt status of municipal securities.”
At Dallas-based Hilltop Securities, one of the nation’s leading municipal bond underwriters and advisers, CEO Tom Kozlik said “any situation where the tax break is not prioritized as an important infrastructure tool is troubling.”
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A recent example underscores how sensitive big projects can be to borrowing conditions: In Nevada and California, Brightline West is restructuring parts of its $2.5 billion in private activity bonds to keep its high-speed rail corridor on track amid rising debt service costs, an illustration of how changes in market terms can affect infrastructure delivery.
Cities are increasingly reliant on these instruments as inflation and labor shortages squeeze project budgets. The NLC found that 71% of municipalities cite water and wastewater systems as their top investment priority, followed by roads and bridges at 63%.
With construction costs still high (ENR’s September 2025 Construction Cost Index shows skilled labor costs rose 4.7% year-over-year and materials remain near record levels), even modest increases in interest rates could erode federal funding gains.
“The tax-exempt general obligation bond plays a crucial role in municipal finances,” the NLC report notes, adding that any loss of exemption could “cost municipal budgets, reduce public investment and hinder long-term economic growth.”
Reduction of margin for error
The federal government shutdown that began Oct. 1 has paused the release of economic data from the Bureau of Labor Statistics and the Census Bureau, leaving municipalities and contractors to forecast inflation and demand with limited visibility. Reuters called it a “data blackout” that increases risk for owners preparing 2026 budgets.
Rising project costs and insufficient capital budgets are the top financial obstacles cited by US municipalities, with 90% and 84% of respondents, respectively, identifying them as the most important barriers to infrastructure delivery, according to the National League of Cities’ Municipal Infrastructure Conditions 2025 report. Chart courtesy of the National League of Cities.
The authors of the NLC report, Farhad Omeyr and Harshita Umesh Tanksali, write that cities are “meeting these challenges head-on with various financing solutions, such as borrowing from the market and leveraging local budgets and strategic planning,” but warn that sustained inflation and policy volatility threaten to “reduce the scope of projects.”
For now, bond issuance remains strong, but any change in tax treatment could raise yields and erode the purchasing power of the remaining Jobs and Infrastructure Investments Act funds.
Analysts say even a 50 basis point increase in borrowing costs could translate into hundreds of millions of dollars in deferred local projects.
Four years after the passage of the IIJA, the bottleneck in American infrastructure may soon be financial rather than bureaucratic.
If Congress retains the tax exemption for municipal bonds, cities can continue to convert federal and local dollars into contracts. If not, much of the promised construction wave could stall before bids hit the street.
