Rep. John F. Tierney has introduced tax reform legislation that would require all tax-exempt municipal bonds to be issued as direct-pay subsidy bonds at a 28% subsidy rate after this year. The bill is part of an effort to eliminate certain tax expenditures and sway the deficit-reduction negotiations driving the legislative agenda.
Tierney, a Democrat in his eighth term representing Massachusetts’ northeast district, has had a tax reform proposal in the works since April. Initially, he proposed to require all new munis be direct-pay bonds with a 25% subsidy rate.
The change to 28% puts Tierney in line with President Obama’s fiscal 2012 budget request, which included permanently reinstating Build America Bonds at a 28% rate, without prohibiting growth of the tax-exempt market.
Based the administration’s budget estimates, Tierney contends the 28% rate will be revenue-neutral.
The legislation would convert all new bonds issued after Dec. 31, 2011, to the direct-pay model, a spokesperson for Tierney said Tuesday.
The Tax Equity and Middle Class Fairness Act was introduced on Monday. It is co-sponsored by four Democrats: Keith Ellison of Minnesota, Raul Grijalva of Arizona, Jesse Jackson Jr. of Illinois, and Betty McCollum of Minnesota.
In a release on the bill, Tierney indicated he is hoping to influence the high-level deficit reduction talks ongoing between Republicans, Democrats, and the White House.
He said his legislation “gives negotiators a clear blueprint for how to proceed on this critical issue.”
The bill would eliminate 30 tax expenditures “that serve little or no public purpose, are poorly designed, or have not fulfilled their original intent,” Tierney said. Nixing them could save $60 billion in the first year and $483 billion over the next five years.
When he initially unveiled his tax-reform proposal, Tierney’s plan drew a frosty reception from issuers and dealers. On one hand, the tax-exempt community wants to see a product similar to BABs return. But market participants said they are not willing to sacrifice new tax-exempt bonds to get BABs back.
Tierney said he is drawing support for his tax expenditure cuts from recent deficit-reduction reports.
In December, Obama’s National Commission on Fiscal Responsibility and Reform — headed by former Sen. Alan Simpson from Wyoming and Erskine Bowles, who was chief of staff to President Bill Clinton — called for tax-exempt debt to be eliminated in the future.
Separately, a report released by the Bipartisan Policy Center’s debt reduction task force in November recommended ending tax-exemption for newly issued private-activity bonds, such as single-family housing bonds, hospital bonds, and small-issue industrial development bonds, beginning in 2012.
That group would maintain the tax-exemption on interest from public-purpose state and local bonds.
That report was compiled 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 BPC.
Rivlin helped found the Congressional Budget Office and formerly headed the White House Office of Management and Budget. She was vice chair of the Federal Reserve Board. Domenici was formerly the Republican chairman of the Senate Budget Committee.
Tierney noted the deficit reports, as well as other criticisms of tax expenditures, highlight the “bipartisan support” for addressing the issue.
His bill would also eliminate itemized deductions for high-income taxpayers, saving $6 billion in the first year.
Rep. Chris Van Hollen, D-Md., the top Democrat on the House Budget Committee, last month called for some tax preferences to be phased out for joint filers who earn more than $500,000 annually.
When the tax cuts from George W. Bush’s administration were extended last December, limitations on itemized deductions were scrapped through 2012.
Obama’s fiscal 2012 budget would reinstate itemized deduction limits for couples earning $250,000 or more. His budget proposal requested a 28% cap on the value of itemized deductions.
