BDA to House Republicans: Maintain Muni Exemption in Tax Plan

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Mike Nicholas, CEO, BDA

WASHINGTON – A repeal of the tax exemption for municipal bonds would cost state and local governments an additional $495 billion in interest over a ten-year period, Bond Dealers of America told Congress.

BDA chief executive officer Michael Nicholas included this estimate in a letter sent Friday to House Speaker Paul Ryan, R-Wis. and Kevin Brady, R-Texas, the House Ways and Means Committee chairman. The letter seemed to be in response to the GOP's blueprint for tax reform under Ryan's "A Better Way" agenda. While the blueprint doesn't directly mention munis, it suggests limiting or eliminating deductions, exclusions and credits.

"Any proposal that focuses on comprehensive tax reform should recognize the vital role that tax-exempt municipal bonds play in providing state and local governments with cost-effective financing for capital projects," Nicholas wrote. "Municipal bonds are the most cost-effective financing method state and local governments use to access the capital markets to finance critical infrastructure projects. Therefore, the tax-exempt status of municipal bonds must be preserved."

In his one-page letter, Nicholas cited the importance of munis in financing community development projects during the past 100 years. Munis have financed more than $1.9 trillion of infrastructure development over the past decade alone, he said.

Though Nicholas lauded what he called the House Republican Conference's "thoughtful process" in reforming the tax code, he said the lack of mention of munis in the proposed plan is not entirely reassuring.

"While this fact is encouraging, statements regarding the elimination of deductions, exemptions and credits create the need to reaffirm the tax-exempt status of municipal bonds," Nicholas wrote.

In the 35-page plan released June 24 by House Ways and Means Committee's Task Force on Task Reform, lawmakers said the blueprint would repeal "numerous other exemptions, deductions and credits for individuals that riddle the tax code" and "generally will eliminate special-interest deductions and credits in favor of providing lower tax rates for all businesses and eliminating taxes on business investment."

The plan would reduce the corporate income tax rate to 20%; reduce the current seven-bracket individual income tax rate to three brackets of 12%, 25% and 33%; and repeal the alternative minimum tax or both corporations and individuals. It would also eliminate the death tax, reorganize the Internal Revenue Service into three independent units and would require taxpayers to submit returns on a postcard.

Brady, who also chairs the House Ways and Means Committee's Task Force on Task Reform, has said the panel will continue to flesh out the blueprint and solicit lobbyist and taxpayer suggestions and concerns before hoping to introduce formal tax legislation next year. The task force's set of principles includes limiting deductions, exclusions and credits that exist in the current tax code.

Like BDA, the Government Finance Officers Association has also said it would stress the importance of the muni exemption as Republican lawmakers continue to develop the tax plan.

Leading Democrats including House Minority Leader Nancy Pelosi, D-Calif. have said the plan would hamper infrastructure investments and would increase the deficit. House Democratic Whip Steny Hoyer, D-Md. has also taken issue with the plan's lack of detail and how it would fund proposed cuts.

Republicans, meanwhile, say the pro-growth blueprint would create jobs, simplify the "broken" tax code and reform the IRS into a customer service-based agency.

The GOP blueprint is the first effort towards a comprehensive tax reform plan since The Tax Reform Act of 2014 proposed by former Ways and Means Committee chairman Dave Camp, R-Mich. Previous deficit reduction plans floated by the National Commission on Fiscal Responsibility and a Bipartisan Policy Center debt reduction task force contained tax proposals to limit or eliminate tax-exempt bond interest to lower rates and broaden the tax base.

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