WASHINGTON — Though several deficit-cutting commissions are recommending Congress and the Obama administration overhaul the tax code and cut tax expenditures, such as the tax-exempt interest from municipal bonds, the head of the Tax Foundation said Tuesday that the budgetary cost of munis is relatively small.
Scott Hodge, president of the Tax Foundation, told members of the Senate Finance Committee at a hearing on tax burdens and benefits that state and local governments will only receive about $86.9 billion in federal tax benefits in fiscal 2011 from the deduction for state and local taxes and through tax-exempt munis.
Hodge said largest tax expenditure for this fiscal year, which ends on Sept. 30, is almost $173.7 billion for the tax exclusion for employer-provided health insurance, followed by $135.4 billion for the tax exclusions for pensions, 401(k) retirement plans, individual retirement accounts and Keogh plans.
The cost of federal aid to state and local governments will also fall behind corporate tax breaks and the mortgage interest deduction in this fiscal year, which Hodge projected to be $102.4 billion and $88.7 billion, respectively.
Only the charitable deduction for individuals, which will cost an estimated $46.2 billion, was lower than the tax expenditures for state and local governments.
But Hodge said in his written testimony: “It is very likely that these governments would not have borrowed as much as they did were it not for the fact that tax-free municipal bonds allow them to pass some of the cost off to the federal government.”
Hodge provided the estimates to the lawmakers after the president’s deficit reduction panel — the National Commission on Fiscal Responsibility and Reform — issued a report late last year that included the idea of doing away with the tax-exempt status of new munis in an “illustrative proposal” for several sweeping tax-law changes.
The commission said the federal tax code is “broken,” “riddled with countless tax expenditures, which are simply spending by any other name,” and “must be reformed.” It was led by Democrat Erskine Bowles, former chief of staff to President Bill Clinton, and former Republican Sen. Alan Simpson from Wyoming.
Meanwhile, a separate report released by the Bipartisan Policy Center’s debt reduction task force in November recommended eliminating tax-exempt interest for private-activity bonds such as single-family housing bonds, hospital bonds, and small-issue industrial development bonds issued after Jan. 1, 2012. It would maintain tax-exemption for public purpose state and local bonds.
That report, called Restoring America’s Future, was written by a task force led by Alice Rivlin, a senior fellow at Brookings Institution, as well as Pete Domenici, a senior fellow at the BPC. Rivlin helped found the Congressional Budget office and formerly headed the Office of Management and Budget and was vice chair of the Federal Reserve Board. Domenici was former Republican chairman of the Senate Budget Committee.
