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Tax Legislation

JCT: $178B For Public Muni Debt

WASHINGTON — The Joint Committee on Taxation released its annual tax expenditure estimates showing $177.6 billion for public-purpose muni bonds over five years, while a governmental group urged President Obama and congressional leaders to “go big” on federal deficit reduction and rely on two reports that proposed curtailing or eliminating tax exemption for new muni bonds.

The 2011-2015 estimated tax expenditures were $54.5 billion for private-activity bonds, $24.4 billion for direct-pay bonds including Build America Bonds, and $1.8 billion for tax-credit bonds, according to the report by the nonpartisan JCT. However, sources pointed out that a law enacted in March 2010 permitted four types of bonds to be issued in either the direct-pay or tax-credit mode.

All muni-related tax expenditures with the exception of tax-credit bonds increased from JCT’s previous five-year estimates. The 2010-2014 tax expenditure estimates were $161.6 billion for public-purpose state and local government bonds, $49.1 billion for PABs, $16.2 billion for direct-pay bonds, and $2.4 billion for tax-credit bonds.

The biggest increase in muni-related tax expenditures for 2011-2015 was for BABs, which was $18.1 billion compared to $12.0 billion for 2010-2014.

Tax exemption attracts perennial attention from tax reformers because it is one of the largest individual income tax expenditures, though it doesn’t make either the JCT’s or the Obama administration’s top 10 list. Topping each of those lists are the exclusion of employer contributions for health care and insurance premiums at $725 billion and the deduction for mortgage interest on owner-occupied residences at $464.1 billion. 

The JCT stresses tax expenditures are not revenue losses or costs to the federal government because the estimates do not anticipate investor behavior, such as how a tax-exempt bond investor would adjust his or her investments without those bonds.

Still, as policymakers consider tax reform and ways to reduce the ballooning federal budget deficit, two commissions, lawmakers, and even the president issued proposals last year to curtail or eliminate tax exemption for new municipal bonds. Many tax experts don’t believe comprehensive tax legislation will be put forth until after the November presidential election, but muni market participants still worry about the potential for curbs to tax exemption.

In a letter sent to Obama and leaders of the House and Senate on Wednesday, the National Conference of State Legislatures recommended they consider two previously issued reports — the Bowles-Simpson “Moment of Truth” and the Bipartisan Policy Center’s “Restoring America’s Future” — as frameworks for placing the nation’s debt on a downward trajectory.

The Bowles-Simpson report contained an “illustrative individual tax reform plan” recommending that there be no tax exemption for new muni bonds. The BPC’s report urged there be no tax exemption for any new private-activity bonds, including bonds for single- and multifamily housing, airports, water and sewer facilities, hospitals and small manufacturing facilities.

The NCSL urged the president to include in his fiscal 2013 federal budget request a “comprehensive, aggressive and bold plan to address America’s long-term fiscal gap” and propose to reduce the federal deficit by at least $4 trillion. The group also urged Congress to pass a budget resolution that would take a similar “go big” approach to put the country on a sustainable fiscal path.

“The White House and Congress need to examine all possible avenues for deficit reduction, including discretionary spending, entitlement reform and revenue-related options,” the NCSL wrote. “We also understand that funding targeted for state and local governments has been and will continue to be reduced. However, our message remains the same — states will struggle if a disproportionate and excessive burden is transferred to us.”

The NCSL’s letter comes after several state and local muni market groups said in December that one of their priorities would be to continue to press their case for maintaining the tax exemption for municipal bonds.

Lars Etzkorn, program director for the center for federal relations at the National League of Cities, said that while the Bowles-Simpson report is a good starting point for deficit reduction and tax expenditures need to be reviewed, eliminating the tax exemption is not good policy.

“Eliminating tax deductibility would fundamentally alter how we pay for infrastructure at a time when we have recognized we haven’t invested in our infrastructure and there is a need to modernize infrastructure,” he said, adding the NLC recognizes that the federal budget is unsustainable and calls for a balanced approach to deficit reduction.

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