Renacci Tax Plan Would Keep Exemption for Munis

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WASHINGTON – A tax reform plan released by Rep. Jim Renacci, R-Ohio, would replace the corporate income tax with a consumption tax and lower individual tax rates while maintaining the tax-exempt status of municipal bonds.

The plan, called Simplifying America's Tax System (SATS), was detailed in an 11-page white paper released by Renacci on Thursday.

"SATS is a bold pro-growth solution to business tax reform that would make our tax system the most competitive in the world," Renacci said. "It would also lower rates across the board so that Americans of all income levels will see a similar increase in after-tax income."

The plan would eliminate the corporate income tax and replace it with a single 7% tax on goods and services for businesses, which Renacci, a member of the House Ways and Means Committee, said would be similar to "consumption tax measures used in every other OECD [Organisation for Economic Co-Operation and Development] country."

He said that the U.S. has fallen "drastically behind" the other 34 countries in the Organisation for Economic Co-Operation and Development because it has the highest corporate tax rate (39.1%) in the industrialized world. SATS, he said, would create a more level playing field among the other countries and increase the competitiveness of U.S. companies.

The United States is the only country in the OECD without a value-added tax, a consumption tax that is added on a product when value is added at the production or distribution stages, he said.

"Taxing all characters of income at the same rate ensures greater fairness and removes current law incentive to aggressively recharacterize ordinary income as capital," Renacci wrote in his proposal.

Though the plan proposes repealing all itemized deductions except for mortgage interest and charitable contributions, a spokesman for Renacci said Thursday that the plan would maintain the exclusion of interest for municipal bonds. Munis are not specifically mentioned in the white paper.

Howard Gleckman, a senior fellow at The Tax Policy Center, said he believes the plan would be "somewhat beneficial" to munis as long as their tax exemption is preserved.

"If [Renacci] is really preserving tax exemption, then munis would be one of a few to still have favorable tax treatment," Gleckman said. "It's something of an incentive to buy them. If I have a choice between buying corporate stock and paying a top 35% percent on capital gains or buying munis and paying 0%, I'm probably going to buy the munis."

Jessica Giroux, general counsel and managing director of federal regulatory policy for Bond Dealers of America, said the plan leaves some questions unanswered.

"Rep. Renacci's tax plan presents an interesting scenario of applying a traditional tiered income tax for individuals but a consumption tax for corporations, but [he] does not make clear whether the full tax exemption for interest earned on municipal bonds would be preserved for individual investors," Giroux said Thursday. "We look forward to working with Rep. Renacci as he reveals more details in his tax plan." Renacci said eliminating the corporate income tax would impact the revenue model of state and local governments' revenue models. The governments would likely have to consider whether to conform their retail sales taxes and state corporate income taxes to the federal base.

Gleckman called the proposal "fairly responsible," but said it would be impossible to know the effect on the revenue model before a more comprehensive analysis is conducted.

The tax reform plan would also impose a one-time tax on accumulated foreign earnings held abroad as well as 8.75% for profits held as cash and cash-equivalents and 3.5% on other assets. The revenue generated from this would go to the Highway Trust Fund.

The proposal would also consolidate the current seven individual tax brackets into three: 10%, 25% and 35%. SATS would increase revenue on a dynamic basis and simplify the revenue collection process, according to Renacci.

The Ohio congressman is currently fielding input from taxpayers as he continues to develop SATS.

Renacci's plan comes three weeks after House Republicans released their blueprint for tax reform under Rep. Paul Ryan's "A Better Way" agenda. That plan would reduce the corporate income tax rate to 20%, reduce the individual income tax rate to three brackets with a top rate of 33%, and repeal the alternative minimum tax for both corporations and individuals. Though the GOP's blueprint does not reference municipal bonds at any point, several muni experts have expressed concern that their tax-exempt status may be in jeopardy.

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