The Senate Budget Committee Democrats' budget resolution for fiscal year 2014 suggests the possibility of percentage or dollar caps on tax preferences such as tax-exempt muni bond interest, pushes traditional tax-credit bonds for transportation, and proposes a $10 billion infrastructure bank to provide loans and loan guarantees for projects.
The 113-page proposal, "Foundation for Growth: Restoring the Promise of American Opportunity," makes suggestions for how to achieve $975 billion in deficit reductions by "eliminating loopholes and cutting unfair and inefficient spending in the tax code for the wealthiest Americans and biggest corporations."
The resolution proposes $1.85 trillion of new deficit reduction: $975 billion from spending cuts and $975 billion from tax reforms.
The proposal says that while the Senate Finance Committee has jurisdiction over tax legislation, "one potential approach is an across-the-board limit on tax expenditures claimed by high-income taxpayers (specifically, the top two-percent of income earners.) This could take the form of a limit on the rate at which itemized deductions and certain other tax preferences can reduce one's tax liability, a limit on the value of tax preferences based on a certain percentage of a taxpayer's income, or a specific dollar cap on the amount of allowable deductions."
"In assessing any such across-the-board limit, Congress should consider the extent to which each proposal would retain a marginal tax incentive to engage in the affected activities and investments," the proposed budget document said.
"Another possible approach by which Congress could increase tax fairness and reduce the deficit is by reforming the structure of particular tax expenditures," it said, referring to the "illustrative tax reform plan" in Simpson-Bowles, a shorthand name for the National Commission on Fiscal Responsibility and Reform created by President Obama.
That commission released a report in December 2010 recommending about $4 trillion in deficit reduction over ten years. It contained an "illustrative proposal" for tax reform that would bar tax exemption for all new municipal bonds.
The Senate Democrats' proposed budget resolution also calls for $10 billion to start an infrastructure bank that would "build on the success of the Department of Transportation's Transportation Infrastructure Finance and Innovation Act (TIFIA) program," which provides loans and loan guarantees to state and local governments for transportation projects.
The bank would be part of a $100 billion infrastructure package that would also include: $50 billion to put workers back on the job repairing deteriorating roads, bridges and airports; $10 billion to create jobs fixing major dams and dredging and maintaining economically critical ports; and $20 billion to jump-start repairs and technology infrastructure investments in schools across the nation.
The proposal would allow the use of traditional tax-credit bonds, such as the TRIP bonds Sens. Ron Wyden, D-Ore., and John Hoeven, R-N.D. proposed in the last Congress, to fund infrastructure. The two Senators introduced legislation that would have authorized each state to issue up to $1 billion of these Transportation Regional Infrastructure Project bonds over a six-year period.
Muni market participants and investors have said traditional tax-credit bonds do not work.
But Wyden said TRIP bonds, subsidized by customs fees and issued by state infrastructure banks, would cost the government only $12 billion over a decade and would be cheaper than direct-pay Build America Bonds, for which issuers receive subsidy payments from the Treasury equal to 35% of their interest costs.
The proposed budget resolution says that while the federal government traditionally relied on tax-exempt bonds to support infrastructure investments by state and local governments, the Congressional Budget Office says "tax-credit bonds offer a more cost-effective way for the federal government to support state and local investments."
The Senate Budget Committee also released a Congressional Research Service report of more than 1,000 pages on tax expenditures.
The report, which was completed in December, states there are over 200 separate tax expenditures in the current law that cost the Treasury more than $1 trillion each year.
The report analyzes every kind of municipal bonds, giving for each one, a description, an evaluation of its impact, the rationale for it, and an assessment of it.
In its assessment of small issue industrial development bonds or private activity bonds that are used to finance business loans of $1 million or less for construction of private manufacturing facilities, CRS says, "It is not clear that the nation benefits from these bonds."
For tax-exempt private activity bonds used to finance private airports, docks and mass-commuting facilities, CRS says, "Even if a case can be made for a federal subsidy due to under-investment at the state and local level, it is important to recognize the potential costs. As one of many categories of tax-exempt private activity bonds, [these] increase the financing costs of bonds issued for other public capital. With a greater supply of public bonds, the interest rate on the bonds necessarily increases to attract investors. In addition, expanding the availability of tax-exempt bonds increases the assets available to individuals and corporations to shelter their income from taxation."
In assessing state and local governmental bonds, CRS says, "The form of the subsidy has been questioned because it subsidizes one factor of public sector production, capital and encourages state and local taxpayers to substitute capital for labor in the public production process. Critics maintain there is no evidence that any under-consumption of state and local public services is isolated in capital facilities and argue that, to the extent a subsidy of state and local public service provision is needed to obtain the service levels desired by federal taxpayers, the subsidy should not be restricted only to capital."
"The efficiency of the subsidy, as measured by the federal revenue loss that shows up as reduced state and local interest costs rather than as windfall gains for purchasers of bonds, has also been the subject of considerable controversy," the CRS added.
Assessing Build America Bonds, CRS says, "For the federal government, the BAB mechanism is a more economically efficient subsidy than tax-exempt bonds." The report notes: "Some observers are concerned that BABS will completely displace tax-exempt bonds, creating uncertainty in a market that has existed since inception of the federal tax law."