WASHINGTON - The Congressional Budget Office has issued a report analyzing the revenue effects of 188 budget options, including replacing exempt interest earnings from muni bonds with tax credits beginning in 2011, which it says would generate $19.8 billion over the next 10 years.
“Budget Options, Volume 2,” issued by the CBO late Thursday, also looked at the revenue savings from limiting or eliminating private-activity bonds, removing federal assistance for the District of Columbia, repealing the low-income housing tax credit, and taxing public utilities.
But the CBO stressed the options are not recommendations, but rather "stem from a variety of sources such as legislative proposals, the president's budget, congressional and CBO staff, other government agencies, and private groups." The budget office said it releases such options on a biennial basis.
Although market participants said they do not expect many of the muni-related options to get serious consideration from Congress, several said the growing federal deficit and cost of health care reform mean that lawmakers will be on the hunt for ways to raise revenue.
Replacing tax-exempt bonds with tax-credit bonds would result in $3.8 billion of revenue gains from 2011 to 2014, the CBO said. Under this option, all interest payments made to municipal bondholders would be taxable and investors would receive a federal tax credit to be determined by the Treasury Department.
Market participants said this idea stems from a CBO paper in 2004 that concluded that tax-credit bonds could provide similar savings to muni issuers as tax-exempt bonds, but cost the federal government less.
The CBO report found that a $23 billion gain over the next 10 years would result if the tax exemption for new private-activity bonds were eliminated in 2011.
Several market participants said the options would not likely have traction because the potential revenue gains are relatively small compared to other options and might not be worth the backlash. The government would obtain only $1.7 billion more a year by switching from tax-exempt bonds to tax-credit bonds, and $2 billion a year by eliminating PABs, while the federal deficit stands at $1.3 trillion, they said.
The savings recouped from these steps are "chump change in the scheme of things," said one bond attorney. "Congress isn't going to pay for health care by changing the tax exemption."
The CBO found that reinstituting the 1997 cap that limited a nonprofit organization's outstanding stock of tax-exempt bonds to $150 million would result in a revenue gain of $2.1 billion over 10 years.
But the report also analyzed options that would be favorable for the muni market. The CBO looked at increasing individual income tax rates and said taxpayers would respond to higher tax rates by pursuing munis and other tax-exempt investments.
The budget office also looked at eliminating the alternative minimum tax, concluding it would cost the federal government $625.8 billion over 10 years. Eliminating the deduction for state and local taxes would increase federal revenues by $861.9 billion over 10 years, the report said.
Another option that would ease state and local budget pressures would be to expand the Medicare payroll tax to include all state and local government employees, the CBO said. This option would increase federal revenues by $2.4 billion over ten years, but also could reduce state and local governments' OPEB, or health care and other nonpension employee benefit, liabilities.
The CBO report -which analyzes the affects of cutting highway funding to states, raising fuel taxes, or eliminating some airport grants - spotlights the question of how to generate enough revenue to pay for transportation projects, said Matthew Jeanneret, senior vice president of communications and marketing for the American Road and Transportation Builders Association.
To keep a positive balance in the perennially endangered highway trust, the CBO said the federal government could simply cut funding to states for highways and bridges, reducing spending by a total of $93 billion through 2019.
From the CBO's budget-balancing standpoint, that option would make sense, according to Joung H. Lee, senior finance analyst for the American Association of State Highway and Transportation Officials. But for state transportation programs, it would be "devastating," he said.
Congress could also increase the fuel tax by 25 or 50 cents for a revenue gain of either $305.1 billion or $604.8 billion through 2019 respectively, the CBO said.
"I think the political pressure against [fuel-tax increases] is fairly strong," Lee said, adding that a 25- to 50-cent hike "seems overly optimistic."
The CBO also considered the option of cutting the Airport Improvement Program that provides grants to airports to expand runways and improve security, saying this would reduce spending by $10.7 billion through 2019.
Because large and medium-sized hub airports "serve many passengers, they generally have been able to finance investment through bond issues as well as through passenger facility charges," the CBO wrote.
PUBLIC POWER AND WATER
The CBO said that taxing public utility income would increase federal revenue by $2.8 billion through 2014. The office claimed that supporters of the tax argue that deregulation has made prices more competitive and less monopolistic, so that public utilities may not be as socially beneficial as they were in the past. But public power advocates said that while CBO routinely analyzes this option, it is unlikely Congress would pursue it.
In addition, the CBO said the federal government could create state revolving funds to finance rural water and waste disposal projects. They would be modeled after the clean and drinking water state revolving funds that already exist and that are capitalized with federal funding and sometimes used in conjunction with bonds.
But the CBO also detailed an option to stop capitalizing clean and drinking water SRFs, which would reduce federal spending by $2.9 billion through 2014.
On the housing front, the CBO determined that Congress could cut spending by $5.36 billion over 10 years if it dropped wealthier communities from participating in the Community Development Block Grant program, and could increase federal reveunues by $29.2 billion over the same time frame if it repealed the low-income housing tax credit.
Housing sources said Friday that they do not expect either of these ideas to be pursued seriously.
The CBO also considered the budget impact of eliminating fiscal assistance to the District of Columbia, concluding it would cut government spending by $2.12 billion over 10 years. In 2009, the federal government provided $202 million in general assistance to the district, but the CBO noted that its bond ratings have substantially increased in recent years, and its $10 billion budget could mean it has the resources to be self-sustaining.