WASHINGTON - Non-governmental entities' access to the tax-exempt bond market should be better controlled, a tax expert told state treasurers Tuesday.
Dennis Zimmerman, director of projects at the American Tax Policy Institute, said he generally sees a case for the federal government subsidizing state and local infrastructure. But "what I find questionable is non-governmental debt," he said at the National Association of State Treasurers' legislative conference.
Historically, when private-activity bonds have become a bigger part of the tax-exempt market, interest rates for all tax-exempt bonds, including governmental bonds, increase, he said.
Zimmerman suggested that the proposal in President Obama's fiscal 2016 budget to change the private-activity bond test for stadium bonds be applied "across the board." Obama's proposal would effectively bar tax-exempt bonds from being used to finance professional sports facilities by making it more likely that the bonds would be taxable PABs.
Under federal tax law, bonds are private-activity bonds if more than 10% of the proceeds are used by private businesses and more than 10% of the debt service is paid from or secured by private parties.
State and local governments can't issue tax-exempt private-activity bonds for professional sports facilities, so they finance them by using governmental bonds. Governments avoid meeting the private-activity bond tests with stadium bonds by having the debt service on the bonds paid from sources other than facility revenues.
But the proposal in Obama's budget would eliminate the private payments test for bonds for professional sports facilities, meaning that bonds for stadiums would be taxable private activity bonds simply if more than 10% of the proceeds were used by private parties.
The elimination of the private payments test should be generalized, Zimmerman said.
Zimmerman also said that he would get rid of tax-exempt industrial development bonds, which are used by manufacturers. Tax-exempt bonds should be used for projects with general public use, he said.
In addition to the stadium bond proposal, Obama's budget included a proposal to cap the value of the municipal bond tax exemption at 28%. The cap has been part of the president's budget request for the past several years.
Zimmerman said he does not see the 28% cap idea disappearing because it is part of a broader conversation about how to control tax expenditures that can disproportionately benefit the wealthy. He suggested that taxable, tax-credit bonds could be another way to prevent wealthy individuals from getting a windfall from the exemption.
Kent Hiteshew, director of the Treasury Department's state and local finance office, said the 28% cap proposal is not "specifically targeted at penalizing the issuance of municipal bonds." Rather, it is part of a larger tax reform plan aimed at reducing the deficit and making the income tax system more progressive. All tax preferences need to be on the table at the outset of a dialogue about tax reform, he said.
Market participants should continue to get across their message, which Hiteshew believes is being heard. He noted that infrastructure proposals in the budget, many of which are favorable for the muni market, could be enacted outside of broad tax reform. For example, tax-exempt PABs for highway and freight transfer facilities were authorized in a 2005 transportation bill.
Several government officials at the local, state and federal levels spoke about the importance of the muni exemption during the conference.
Timothy Firestine, chief administrative officer of Montgomery County, Md., provided a "top-10" list of reasons why the muni exemption should be preserved.
NAST President and Tennessee Treasurer David Lillard called bonds "the backbone of state and local infrastructure projects and their financing." If the tax treatment of munis were changed, municipalities would have higher borrowing costs and would not be able to finance as many infrastructure projects, he said.
Rep. Randy Hultgren, R-Ill., said that many state and local governments are facing fiscal challenges that make it harder for them to finance infrastructure and "municipal bonds are a lifeline to local governments," he said.
Hultgren and Rep. Dutch Ruppersberger, D-Md., are circulating a letter to their colleagues that urges House leadership to support the muni exemption. Hultgren encouraged state treasurers to ask their members of Congress to sign the letter.
