WASHINGTON — Tax-exempt interest from public purpose state and local government bonds was estimated to be the fourth largest corporate tax expenditure in fiscal year 2013, according to a Congressional Research Service report that used data from the Joint Committee on Taxation.
The tax exclusion for these bonds was projected to lead to a corporate income tax revenue loss of $9.3 billion in fiscal 2013, which began Oct. 1, 2012 and ended Sept. 30, 2013. That amount is 6.2% of the total revenue losses associated with corporate tax revenue expenditures, CRS said in the report, which was released last week.
Corporations that hold municipal bonds include banks and property and casualty insurance companies.
President Obama has repeatedly called for corporate tax reform that would produce savings that could be used to finance infrastructure.
Bill Daly, director of governmental affairs for the National Association of Bond Lawyers, said that he hasn't seen any corporate tax reform proposals to change the tax exemption for municipal bonds so far. However, that could change because of this report, he added.
The corporate income tax revenue loss from the tax exclusion for state and local bonds was estimated to be less than: the losses from the deferral of active income of controlled foreign corporations; the depreciation of equipment in excess of the alternative depreciation system; and the deduction for income attributable to domestic production activities, according to the report.
In total, corporate tax expenditures were projected to cause a revenue loss of $149.5 billion in fiscal 2013. However, "individual tax expenditures result in nearly eight times the revenue loss to the federal government ... relative to corporate tax expenditures," the report said. The individual income tax revenue loss from the exemption of interest from public purpose state and local government bonds was estimated to be $26.5 billion for fiscal 2013, according to JCT.
The CRS report was not the first one to list the exemption for state and local bonds as the fourth-largest corporate tax expenditure. A paper using JCT estimates for fiscal 2011 had the same finding.
