Report: Debt-Limit Pact Should Include Muni Measures

WASHINGTON — The Center for American Progress says any debt-limit agreement should contain expenditure cuts, including eliminating tax-exemption for private-activity bonds and making other new munis direct-pay bonds with a 25% subsidy rate.

In its “Good News on Deficit Reduction” report, released Thursday, the group said $23 billion can be saved over 10 years by eliminating the federal tax subsidy for private-activity bonds. It said $32.9 billion can be saved over the same period by moving from tax-exempt bonds to direct-pay bonds at the 25% rate.

The report highlighted the recent Senate vote to end ethanol subsidies as a sign that Congress is taking a serious — and bipartisan — look at tax expenditures as a way to reduce the deficit. The liberal think-tank group, which is headed by John Podesta, President Bill Clinton’s last chief of staff, said that $1.1 trillion can be saved from fiscal 2012 to 2021 by eliminating tax subsidies — mostly tax deductions for oil companies and vacation homes — and by changing the tax treatment for hedge fund and private-equity managers.

“There is no justification whatsoever for these tax-enabled spending programs,” said the report’s authors, Seth Hanlon and Michael Linden. “And there are plenty of other such spending programs in the tax code.”

Hanlon co-authored a report last month that called for a cap on the tax-exempt bond market combined with a revived and expanded Build America Bond market. That report gave no specific subsidy rate for BABs, but said Congress should have the authority to alter the subsidy rate as economic conditions warrant.

So far, only one lawmaker has talked about BABs at a 25% rate. In April, Rep. John Tierney, D-Mass., has said he plans to introduce a bill to require new munis to be taxable, direct-pay bonds with a 25% federal subsidy rate. That rate would be lower than the 28% called for President Obama in his fiscal 2012 budget proposal, which would permanently reinstate the BAB program.

Tierney’s proposal, which would be part of a larger tax reform package, has not been introduced yet.

The CAP report follows several deficit-reduction reports released last year that called for reining in tax-exempt financing to cut costs. Obama’s National Commission on Fiscal Responsibility and Reform suggested ending tax-exempt interest for all new municipal bonds as part of a comprehensive effort to reform the federal tax code.

The group was led by Democrat Erskine Bowles, Clinton’s former chief of staff, and former Republican Sen. Alan Simpson of Wyoming.

Separately, a report released by the Bipartisan Policy Center’s debt reduction task force in November would maintain the tax-exemption on interest for public-purpose state and local bonds. However, it would end the practice by Jan. 1, 2012, for newly issued private-activity bonds such as single-family housing bonds, hospital bonds, and small-issue industrial development bonds.

That report, called Restoring America’s Future and released by the Brookings Institution, was written by a task force led by Alice Rivlin, a senior fellow at Brookings Institution, as well as Pete Domenici, a senior fellow at the BPC. Rivlin helped found the Congressional Budget Office and formerly headed the White House Office of Management and Budget and was vice chair of the Federal Reserve Board. Domenici was former Republican chairman of the Senate Budget Committee.

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