Budget & Finance

Democrat Alternative to Sequestration Would Benefit Munis

FEB 14, 2013 5:27pm ET
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The Democrats on Thursday released a $110 billion alternative plan to the sequester that includes the so-called Buffet Rule, which muni market participants say would make municipal bonds more attractive.

The Buffet Rule, named for Berkshire Hathaway chairman and chief executive officer Warren Buffet who said he should not have a lower tax liability than his secretary, is designed to ensure that taxpayers with a gross adjusted income of more than $1 million do not pay a lower effective tax rate than middle class families.

Under the Buffet Rule in the Democrats’ proposed alternative, The American Family Economic Protection Act, taxpayers with adjusted gross incomes of more than $1 million would have to pay a 30% tax on all of their adjusted gross income, less charitable contributions.

The Buffet Rule is in the revenue raiser part of the three-part plans, which would obtain a total of $55 billion of new revenue from the wealthiest Americans and biggest corporations, $27.5 billion from defense spending cuts and $27.5 billion from domestic spending cuts.

Muni market participants said that this version of the Buffet Rule, which is based on adjusted grow income that does not include tax-exempt interest, would benefit munis.

“If it’s hinging on adjusted gross income, then its positive, in theory it helps munis,” said Matt Fabian, managing director of Municipal Market Advisors. "The fact that the Democrats are not proposing the 28% cap gives some hope that munis will be left out” of any plans to raise revenue, he said.

Fabian pointed out that “the Buffet Rule is really tax reform” and has other major upsides for munis.

“If the Congress can get past sequestration then they won’t be forced to do tax reform and this Congress is not prone to do things they are not forced to do,” he said. “In general this is good for munis because the longer it takes to get around to tax reform, the more time the issuers have to make the case for tax exemption.”

But Fabian and most other muni market participants do not see Republicans supporting the Democrat alternative to the sequester because they are staunchly opposed to raising taxes.

The Buffet Rule would reduce the deficit by $54 billion, according to a release from the Senate Budget Committee. A second revenue raiser would eliminate a tax break that encourages companies to ship jobs overseas by denying tax deductions for costs associated with outsourcing. A third would eliminate a special tax loophole for oil companies, by including oil from tar sands among the petroleum products that are subject to taxes that support the oil spill liability trust fund.

The act also would cut defense spending partly through the troop withdrawal in Afghanistan, and cut domestic spending partly by cutting farm subsidies.

Senate Budget Committee chairman Patty Murray, D-Wash., urged Republicans to help Democrats pass the proposal before March 1, to avoid the $85 billion of across-the-board federal spending cuts that administration officials and most lawmakers warn would could throw the economy back into a recession.

Earlier in the day, federal agency officials told members of the Senate Appropriations Committee about the disastrous affects sequestration would have on Americans. Shaun Donovan, head of the Department of Housing and Urban Development, said the sequester would take away $3 billion of Sandy relief authorized by Congress and make huge cuts in the Community Development Block Grant program, and housing programs, a key driver of the economy

Janet Napolitano, head of Homeland Security, said the sequester would seriously cut funds for airports, seaports and land ports.

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