Muni Market Should be Wary of GOP Budget's Take on Tax Reform

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WASHINGTON — Municipal market participants should be concerned about the House Republican fiscal 2015 budget plan unveiled by Rep. Paul Ryan on Tuesday because it calls for substantially lowering the individual and corporate tax rates, which would put at risk many tax expenditures such as the tax exemption for municipal bonds, several muni experts said.

Ryan, R-Wis, who wants to replace Rep. Dave Camp, R-Mich., as chairman of the House Ways and Means Committee next year, also said in the budget resolution that tax exclusions and deductions are loopholes that add up to more than $1 trillion per year and make the tax code "unfair, inefficient and highly complex." He said they disproportionately benefit the wealthy.

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In addition, Ryan and the Republicans suggest curbing the federal government's role in providing transportation funding to states and localities.

The FY-2015 budget resolution states that Congress should enact tax-reform legislation that "substantially lowers tax rates for individuals," with the goal of having two income tax brackets for individuals of 10% and 25%. It also calls for lowering the corporate tax rate to 25%.

Other principles in the budget resolution include simplifying the tax code "to make it fairer to American families and businesses," transitioning to a more competitive international taxation system and repealing the alternative minimum tax.

The House Budget Committee is expected to consider the budget resolution on Wednesday. While it is not clear whether the resolution would be approved by the full House, it would never be put to a vote in the Senate. Senate Budget Committee chairman Patty Murray, D-Wash., has already said she will not propose a budget resolution for FY-2015.

Ryan unveiled the budget resolution one day after Camp announced that he would not run for reelection to the House in the fall. A key takeaway from the resolution is that the possible replacement to Camp is "very much committed to tax reform," said Micah Green, a partner at Patton Boggs and the former president and co-chief executive officer of the Securities Industry and Financial Markets Association.

There's no question that any comprehensive tax reform effort would put "all tax expenditures under review," including the tax-exemption for municipal bonds, Green said.

Susan Collet, senior vice president of governmental relations for the Bond Dealers of America, said that to achieve the goal of lowering the top tax rate to 25%, you have to take an "everything is on the table approach" to curbing tax preferences. This is similar to Camp's approach to tax reform, she said.

Camp released draft tax reform legislation in February that would cap the value of the tax-exemption for municipal bond interest at 25%, and eliminate the tax exemption after 2014 for new issues of both qualified private-activity bonds and advance refunding bonds.

The budget resolution does not endorse Camp's proposal or any other tax-reform plan, but a description of it said that there are many good ideas. It also said the Joint Committee on Taxation has determined that Camp's plan would increase real gross domestic product by between 0.1% and 1.6%. Ryan said the budget should "grow the economy."

Bill Daly, director of governmental affairs for the National Association of Bond Lawyers, said the budget resolution suggests going further than Camp's draft tax reform plan in terms of tax rates. Camp proposes a top individual tax rate of 35% for some individuals, which appears to fall short of meeting the tax-reform goals in the House Republican budget resolution.

Camp's draft did not appear to have widespread support from Republican colleagues. Ryan consulted with House Republican leadership and members of the party's caucus. He tried to put something together that would pass in the House with support of the caucus, Daly added.

Collet said, though, that the language in this budget resolution is consistent with the language in past ones.

Frank Shafroth, director of the State and Local Leadership Center at George Mason University, said the Ryan budget would be a "double whammy" to transportation funding.

Lowering the top tax rate for individuals to 25% would make municipal bonds less attractive to investors, so it would be more expensive for state and local governments to issue bonds for transportation, he said.

Additionally, the summary to the budget resolution recommends aligning spending from the federal Highway Trust Fund with the dwindling incoming revenues that are being collected. It also suggests that there could be a pilot program for states to opt out of the federal gas tax and forgo federal allocations. Basically, Ryan is suggesting a phase out of the federal role in surface transportation funding, Shafroth said.

The budget "would have harsh repercussions for states and local governments and the municipal bond market," he said.

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