Taxation

Democrats' Alternatives to Sequester Will Help, Not Hurt Munis

FEB 12, 2013 4:46pm ET
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WASHINGTON – It’s unlikely that any short-term fixes to the upcoming mini fiscal cliffs, including sequestration, will include significant measures that would curtail or eliminate tax-exemption. In fact, at least two legislative alternatives to sequestration being drafted by Democrats would actually make tax-exempt bonds more attractive by imposing a minimum 30% rate on individuals with adjusted gross incomes that exceed $1 million.

Instead tax proposals, such as the 28% cap on the value of tax exemption, could be worked into a larger deficit reduction plan later this year, according to Rep. Chris Van Hollen, D-Md., House Budget Committee ranking member.

Speaking at an event at the National Press Club Tuesday morning alongside Rep. Tom Price, R-Ga., vice chair of the House Budget Committee, Van Hollen outlined his proposal to replace the across-the-board budget cuts known as sequestration.

Van Hollen’s proposal would pair targeted spending cuts with new revenue to replace the $85 billion automatic budget cuts set to take effect on March 1. The proposal, which would last through the end of this year, would close tax loopholes and expenditures as a way to capture more revenue.

Specifically, Van Hollen said he would target carried interest and tax breaks for oil companies, while cutting farm subsidies.

“It would prevent the sequester and give us time to work on a balanced deficit reduction plan that would include that other kind of tax reform,” Van Hollen told The Bond Buyer, referring to proposals such as the 28% cap. The 28% cap proposal has been around since President Obama first introduced it in his 2011 jobs bill and then again in his 2013 budget.

Additionally, Van Hollen questioned Republican motives and accused his colleagues of not taking deficit reduction seriously.

“If the priority was really was deficit reduction, you’d be willing to close some oil and gas loopholes,” Van Hollen said. “The overall priority here is really not deficit reduction on the Republican side.”

Price scoffed at Van Hollen’s suggestion that Republicans weren’t serious about deficit reduction.

“We have got, in this town, to get to talking about specific policy solutions,” Price said. “Let’s take motive off the table. If we are going to impugn each other’s character in motive with every discussion about policy, how destructive is that?”

Republicans staunchly oppose new tax revenues as part of any sequester proposal replacement plan. They also have indicated that closing corporate tax loopholes should be left to a comprehensive overhaul of the tax code instead of put in any short-term fiscal fix.

“The closing of loopholes ought to be used for tax reform that lowers rates and makes the code simpler and fairer for families and job creators — not for more spending,” said a House Ways and Means Committee spokesperson.

Meanwhile, Senate Democrats plan to propose a bill later this week that would temporarily replace the sequester. The bill, being drafted by Sens. Patty Murray, D-Wash., Barbara Mikulski, D-Md., and Max Baucus, D-Mont., will include equal amounts of revenue and cuts, Senate Majority Leader Harry Reid, D-Nev., told reporters Tuesday afternoon.

“Democrats believe the right way to reduce the deficit is to target waste and abuse by pairing smart spending cuts and closing tax loopholes and asking the wealthiest Americans to contribute,” Reid said.

Reid said he hopes to have a vote on the proposal after the Senate returns from the President’s Day weekend. The proposal is expected to include a revival of the so-called “Buffett Rule,” which would impose a minimum 30% tax rate on taxpayers whose adjusted gross income exceeds $1 million, including capital gains and dividends.

The rule, named after billionaire Warren Buffett, was initially proposed in President Obama’s State of the Union address last year. 

In response to the Senate Democrats’ alternative sequestration proposal, Senate minority leader Sen. Mitch McConnell, R-Ky., said that Congress needs to keep its commitment made more than one year ago as part of the Budget Control Act to achieve spending reduction without raising taxes.

“We made a bipartisan promise to the American people we would reduce this spending without raising taxes,” McConnell told reporters. “Now the president has once again tried to introduce new taxes into it. The tax issue is over.”

Sequestration was passed with the Budget Control Act of 2011 and would achieve $1.2 trillion in deficit reduction savings through across-the-board budget cuts. McConnell said it was “pretty clear” that the sequester would go into effect on March 1 because there was no evidence from the House to act on it before the end of the month.

Separately, Sens. Sheldon Whitehouse, D-R.I., Carl Levin, D-Mich., Tom Harkin, D-Iowa., and Bernie Sanders, I-VT., drafted a bill that would eliminate the sequester for fiscal year 2013, which ends Sept. 30.

It would also eliminate tax loopholes for high-income taxpayers, offshore manufacturers, and oil and gas companies. This bill would also impose the so-called “Buffett Rule.”

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