WASHINGTON — The tax exemption for general purpose state and local debt has consistently been one of the biggest corporate tax expenditures since 1975, according to the Joint Committee on Taxation.
In a report released Friday, JCT listed estimates of the 10 largest individual and corporate tax expenditures in five-year intervals starting with fiscal 1975. "Only the exclusion of interest on general purpose state and local government debt appears among the top corporate tax expenditures every year," JCT said.
The exemption for state and local debt only made the list of the ten biggest individual tax expenditures from fiscal 1990 to 1994. JCT estimated that the exclusion resulted in individual revenue losses of $54.1 billion during that time. Individual tax expenditures tend to be of greater magnitude than corporate tax expenditures, JCT said.
The report was released ahead of Tuesday's Senate Finance Committee hearing on the lessons Congress can learn from the 1986 Tax Reform Act.
The report is also relevant for the Finance Committee's tax reform working groups, said Micah Green, co-chairman of Squire Patton Boggs's financial services and tax practice. Finance Committee Chairman Orrin Hatch, R-Utah., has said that the working groups' endeavors should lead to tax-reform legislation being introduced later this year.
Having the exemption for state and local debt on the top-10 list makes it important for the municipal bond community to explain to Congress why the exemption is good and works well, Green said.
As part of tax reform, some policy makers want to curtail tax expenditures to lower tax rates or flatten the rate structure, said Michael Decker, a managing director and co-head of municipal securities at the Securities Industry and Financial Market Association.
The extent to which bonds are on the list of largest expenditures "highlights the risk that they could be the target of action in the context of tax reform," he said.
Green said that if tax rates are reduced under tax reform, the demand for tax-free investments could decrease. But corporations can hold tax-exempt bonds to manage their short-term cash flow, so they may still have a need to hold bonds even if tax rates are reduced, he said.
Tax expenditures are revenue losses to the federal government due to tax preferences. JCT measures each expenditure by calculating the difference between the tax liability under current law and the tax liability that would occur if taxes were recomputed without the preference, JCT said.
JCT estimated the amount of revenue loss from the tax exemption for state and local debt that's attributable to corporations separately from the revenue loss attributable to individuals. According to the Federal Reserve, most municipal bonds are held by individuals, either directly or through funds, but corporations like banks and insurance companies also hold a sizable amount of bonds.
On the corporate side, the exemption for state and local debt was estimated to have resulted in revenue losses of $15.7 billion from fiscal 1975 to 1979, $21.9 billion from fiscal 1980 to 1985, $54.4 billion from fiscal 1985 to 1989, $6.6 billion from fiscal 1990 to 1994, $17.5 billion from fiscal 1995 to 1999, $27.2 billion from fiscal 2000 to 2004, $38.3 billion from fiscal 2005 to 2009 and $45.3 billion from fiscal 2010 to 2014.
For fiscal 2014 to 2018, the exclusion of interest from governmental bonds attributable to corporations is expected to result in revenue losses of $49.2 billion, JCT said.
Other types of bonds also made the list of top-10 biggest corporate tax expenditures. The exemption for state and local housing bonds made the list for the period from fiscal 1980 to 1984, and the exemption for industrial development bonds made the list for the period from fiscal 1985 to 1989.
