The top Democrat on the House tax-writing committee defended itemized tax deductions Friday that would be repealed under some tax reform proposals, but did not take a position on whether to maintain the federal tax exemption for interest earnings from state and local bonds.
Rep. Sander Levin, D-Mich., the ranking minority member on the House Ways and Means Committee, told reporters that the tax-exempt status for state and local debt is something “we need to take a hard look at.”
In a speech at the Center for American Progress, Levin defended the need for popular deductions such as those for mortgage interest and state and local property taxes, warning their elimination “simply will not happen.”
Many of the deductions were criticized as costly tax expenditures by the President’s National Commission on Fiscal Responsibility and Reform, which was co-chaired by Erskine Bowles, former President Bill Clinton’s chief of staff, and Alan Simpson, the former Republican senator from Wyoming.
The commission’s report included the idea of doing away with the tax-exempt status of new munis in an “illustrative proposal” for several sweeping tax-law changes.
Another report, written by a task force led by Alice Rivlin, a senior fellow at the Brookings Institution, as well as Pete Domenici, a senior fellow at the Bipartisan Policy Center, recommended eliminating tax-exemption for new private-activity bonds as of Jan. 1, 2012.
Asked about these recommendations, Levin said, “We have to look at [the] implications. What would it mean? You can’t just do it blindly.”
However, Levin criticized Republicans over their refusal to reinstate the Build America Bond program.
“We’ve had a big fight over Build America Bonds,” he said. “The Republicans got up on the floor and they argued against [BABs] by saying, 'Why are we doing this? Leave it to the private sector.’”
BABs were “a necessary program to invest in the work of the private sector,” he said.
Tax-exempt munis have come under fire as deficit reduction talks heat up. The tax exemption is criticized as an inefficient tax expenditure to subsidize state and local infrastructure projects. But some market participants have recently said munis will survive any tax changes because their cost to the federal government does not justify their elimination.
The survival of tax-exempt bonds “seems a likely outcome” in the tax-reform debate, said Steven Harvey, a senior portfolio manager for Standish Mellon Asset Management Co., a division of Bank of New York Mellon.
Harvey co-authored an April report on the municipal tax-elimination issue that asserted none of the proposals to eliminate munis “would be easy to enact.” Elected officials and nonprofit organization leaders can be expected “to raise formidable grass-roots opposition to any effort to eliminate such a valuable financing tool,” it said.
The report noted the Joint Tax Committee in December ranked federal tax exemption for municipal bond interest ninth among the top 10 federal tax expenditures. Between 2010 and 2014, the muni tax exemption will cost the federal government about $200 billion, the committee estimated.
In contrast, the exclusion of employer health care contributions will cost about $650 billion and the home mortgage interest deduction will cost nearly $500 billion, it said.
