President Obama is not specifically targeting municipal bonds in his proposal to cap the value of tax exclusions and deductions at 28%, Jack Lew, his nominee for Treasury secretary, said Wednesday. At the same time he told lawmakers that tax reform will require “hard choices.”
Speaking to Senate Finance Committee members at his confirmation hearing, Lew, when asked about the cap, said: “It was intended to be a placeholder. We put it in as a fallback so that if tax reform doesn’t happen, this is how we can get the revenues we need.”
He was responding to Sen. Maria Cantwell, D-Wash., who said she could not understand why Obama would do anything to hurt munis, since they provide “cheap capital” to state and local governments for infrastructure and other needs.
Obama, in his fiscal 2013 budget request and earlier draft legislation on jobs, sought to cap the value of all tax expenditures at 28% for the rich to ensure they can’t use income tax deductions and exclusions to significantly lower their tax liability. The proposal specifically included munis, which are a tax expenditure because their interest earnings are excluded from income tax calculations.
Municipal market participants have warned that such a cap would amount to an unprecedented retroactive tax on munis that would raise borrowing costs for issuers, bring chaos to the muni market, potentially lead to huge investment losses for those holding munis, and make investors wary of tax-exempt bonds. If a cap was adopted, market participants and investors would fear that it could always be lowered in the future, market participants have said. State and local government and dealer groups have been lobbying against the cap.
Lew told Cantwell that the cap “wasn’t specifically directed at municipal bonds or at other specific areas of tax activity.
He offered to follow up with Cantwell on the cap, but added: “As a general proposition ... the hard decisions in tax reform will in many cases put us in places where there are things that we, many of us, are sympathetic to where we have to curtail tax benefit if we’re going to broaden the base.”
Lew, who has served most recently as the White House chief of staff, also was clear that sequestration would be a disaster and should be replaced with a package of spending cuts and revenue raisers. The president thinks there should be a two-to-one ratio of spending cuts to revenue raisers, Lew said, adding he agrees with that.
“Nobody likes to raise taxes,” he said. “But we have to pay our bills.”
Sen. Johnny Isakson, R-Ga., asked Lew if he regretted agreeing to put the sequestration measure in the deficit-reduction package negotiated before the end of last year. Lew said it had to be done to avoid a default of United States debt. “The full faith and credit [of the federal government] was at issue,” he said.
The administration and Congress have already achieved $2.5 trillion in deficit reduction and another $1.5 trillion is needed, Lew said, adding: “Sequestration is so objectionable that we ought to just do our work and solve this.” Lew also strongly supported the Dodd-Frank Act and its mandates for many new financial regulations.
Rep. Pat Toomey, R-Pa., complained the new law has created so many new rules that firms have had to hire new compliance officers.
But, Lew said, “We also ought to be aware of the costs of the failure to regulate properly,” harkening back to the financial crisis and recession. “We have to worry about systemic risk.”.
As for his stint as chief operating officer at Citigroup during the financial crisis, and his investment in a fund based in the Cayman Islands, Lew said that he lost money on that investment and pulled out of it in 2010. “I reported all of the income I earned. I paid all of the taxes due,” he said. Lew said he was are of but not involved in Citi’s risky products.
Lew also was previously director of the Office of Management and Budget, deputy secretary of state for management and resources, and executive vice president for operations at New York University.