This bill provides a 28% tax credit to state and local governments for interest paid on "American infrastructure bonds," used to fund public projects, while making the interest taxable at the federal level.
Roger Wicker
Senator
MS
The American Infrastructure Bonds Act of 2025 introduces a tax credit for state and local governments that issue "American infrastructure bonds" to fund infrastructure projects. The federal government will pay the bond issuer 28% of the interest payable on each interest payment date. This aims to lower the cost of borrowing for infrastructure projects, but the interest on these bonds is taxable at the federal level. This act applies to bonds issued after the enactment date of this law.
New Bill Offers 'American Infrastructure Bonds': Feds Pay Issuers 28% of Interest, Bondholders Pay Federal Tax
This bill proposes a new way for state and local governments to borrow money for public projects like roads, bridges, or schools, called American Infrastructure Bonds. Instead of the interest paid to bond buyers being tax-free at the federal level (like traditional municipal bonds), the government entity issuing these new bonds would receive a direct cash payment from the federal government equal to 28% of the interest due on each payment date. However, investors who buy these bonds would have to include the interest they receive as part of their gross income for federal tax purposes.
A Different Flavor of Funding
So, how does this actually work? A city, county, or state agency looking to fund a public project (that isn't a 'private activity bond' benefiting a private entity) could choose to issue these American Infrastructure Bonds instead of traditional tax-exempt bonds. By making this choice, they lock in that 28% direct federal payment for each interest payment they make over the life of the bond. This essentially acts as a federal subsidy paid directly to the issuer. For investors, the key difference is the tax treatment: unlike the interest from most municipal bonds (governed by Internal Revenue Code section 103), interest from these new bonds is subject to federal income tax. The idea seems to be shifting the federal subsidy from the bondholder (via tax exemption) directly to the government entity doing the building.
State Taxes and Safeguards
The bill anticipates how states might react. It sets a default rule: unless a state legislature specifically passes a law saying otherwise after this bill becomes law, the interest earned on these bonds, and the 28% credit received by the issuer, will be treated as tax-exempt for state income tax purposes. This could make the bonds more attractive within certain states. The legislation also includes a safeguard for the issuers receiving the federal payments: if automatic federal spending cuts (known as sequestration) are triggered, the 28% payment amount will be automatically increased to fully offset those cuts, ensuring the issuer receives the intended amount. This provision aims to make the subsidy more reliable for planning purposes.
The Bottom Line
This creates an alternative financing tool for public infrastructure. State and local governments gain a direct, potentially more predictable federal subsidy (that 28% payment) instead of relying on the indirect benefit of offering tax-free interest to investors. Investors, meanwhile, would face federal taxes on the interest but might find the bonds appealing depending on the interest rate offered and their state's tax rules. The Treasury Department is tasked with creating specific regulations to manage the program. This new bond option would apply to bonds issued any time after the bill is signed into law.