WASHINGTON — The municipal bond tax exemption could be at risk under a proposal from presidential candidate Hillary Clinton to reduce student debt.
The "New College Compact" proposed recently by Clinton, a Democrat and former Secretary of State, would cost about $350 billion over 10 years and would be paid for "by limiting certain tax expenditures for high-income taxpayers," according to a campaign fact sheet. Other fact sheets from the campaign similarly state that the student-debt proposal would be paid for "by closing tax loopholes and expenditures for the most fortunate."
The fact sheets do not say which tax expenditures would be curbed and by how much they would be capped. But a campaign aide told Tax Analysts that the offset would be similar to one that's been in a number of President Obama's budgets. Campaign staff would not comment beyond the fact sheets. The president has proposed capping the value of many tax expenditures, including the exclusion for muni interest, at 28%.
Many muni groups have criticized the White House's 28% cap proposal, and over 100 House members signed a letter this year expressing concerns with it.
Bill Daly, director of governmental affairs for the National Association of Bond Lawyers, said that while it's unclear if Clinton's plan would limit the value of the muni exemption for high earners, if it does, it's "distressing."
Clinton's proposal illustrates that once something is on the list of offsets, it is "always on that list," Daly said. The plan is an indication that the muni market needs to continue to educate people in Congress, the executive branch and campaigns about the importance of munis for infrastructure, he added.
"You always have to be vigilant," Daly said.
Michael Decker, managing director and co-head of municipal securities at the Securities Industry and Financial Markets Association, urged policymakers to maintain the full muni tax exemption without commenting directly on Clinton's proposal.
"Tax-exempt bonds are an established, proven means of financing the nation's infrastructure," he said. "Any curtailment in the tax-exemption would result in higher financing costs and an even larger shortfall in infrastructure investment."
Mike Nicholas, chief executive officer of the Bond Dealers of America, did not comment specifically on Clinton's proposal but pointed out that a 28% cap would not just affect high-income people.
"Capping the value of municipal bond interest at 28% would significantly increase the cost of borrowing for state and local governments," he said. "While it's described as increasing taxes for wealthy families, the proposal would actually hurt all taxpayers as it would reduce the value of all bonds in the secondary market by as much as $200 billion. About half of that loss would fall on households with income of less than $250,000."
Chuck Samuels, a member of the law firm Mintz Levin Cohn Ferris Glovsky and Popeo, said he would expect to see lots of proposals from presidential candidates, particularly Democrats, that are paid for by taxing "high earners." After that, "the devil will be in the details," he said.
Samuels pointed out that there are often differences between what candidates propose on the campaign trail and what they propose once they're in the White House.
Clinton's student debt plan would, among other things, allow those with debt to refinance loans at current rates and significantly reduce interest rates for future undergraduates. The proposal also includes free tuition for students at community colleges and is designed to ensure students will not have to take out loans to pay for tuition at a public university in their state.
Clinton faces several challengers for the Democratic nomination for president, including Sen. Bernie Sanders of Vermont. There are more than a dozen candidates for the Republican nomination.
