WASHINGTON — Members of the U.S. Conference of Mayors and the National League of Cities participated in a White House sponsored conference call with President Obama earlier Wednesday to talk about the fiscal cliff and impacts any year-end budget deal would have on state and local governments.
Obama told the groups on the roughly 20 minute conference call that when attempting to fix tax loopholes, he understood the sensitivity to the state and local tax deduction, the charitable deduction, and the exclusion of tax-exempt interest from municipal bonds.
The groups had hoped to get clarity on the president’s position on tax-exempt bonds but did not have the opportunity, sources said.
St. Paul, Minn. Mayor Chris Coleman, who was on the call, said he and others will not be silent on the issue of tax exemption. “We will continue to be very vocal on the issue,” Coleman said. “You will see a significant shutdown of local projects if that expenditure goes away.”
Meanwhile, the National Governors Association issued a paper Wednesday warning that states would be hit hard if Congress allows the nation to fall off the fiscal cliff.
The fiscal cliff, coined by Federal Reserve Board chairman Ben Bernanke, refers to $1.2 trillion in across-the-board cuts, the end of the payroll tax holiday and extended unemployment benefits, a sudden steep reduction in Medicare physician payments, and the expansion of alternative minimum tax to more taxpayers.
“Going off the cliff will hit states hard: federal grants to states will be reduced, and defense procurement and spending on bases around the country will be cut even more than federal grants,” NGA said in the paper. “As federal income and social security taxes go up, state residents will have less income to spend, and the higher AMT will hit the disposable incomes of middle and upper middle income families, especially families in states with relatively high taxes.”
“In addition, federal unemployment benefits will drop, and the reimbursements that doctors get from Medicare will go down by 30%,” the group said.
But there are major downside risks to states even if the cliff is avoided because the nation’s long-term fiscal problems cannot be addressed without reforming the federal tax code, including tax provisions that benefit states such as the exclusion of tax-exempt interest from muni bonds, and cutting rates of growth of Medicaid and other health care programs, it said.
“There is broad agreement of the need for tax reform that lowers rates to make us more competitive, and reduces special exemptions, usually called tax expenditures,” NGA said. “Any review of tax expenditures will involve review of those provisions that are most beneficial to states. The paper included a chart from President Obama’s fiscal 2013 budget request showing a total of $105 billion associated with tax expenditures that benefit states — $69 billion from the deductibility of state and local income, sales and property taxes, and $36 billion from the exclusion of interest on public purpose state and local bonds.”