WASHINGTON — The federal debt limit must be raised by the end of March to avoid the suspension of federal programs such as state and local government series securities that municipal issuers purchase for advance refunding escrows, Treasury Secretary Timothy Geithner warned Thursday.
In another development that could potentially affect the muni market, House Ways and Means Committee chairman Dave Camp, R-Mich., said Wednesday night that the panel will make tax reform a priority issue in the 112th Congress, which is now in session.
On the debt limit, Geithner told Senate Majority Leader Harry Reid, D-Nev., Thursday that $13.95 trillion of federal debt subject to limitation is outstanding, leaving only about $335 billion of “headroom” from the current limit of $14.29 trillion.
“The Treasury Department now estimates that the debt limit will be reached as early as March 31, 2011, and most likely sometime between that date and May 16, 2011,” but is subject to change depending on the economy and other factors, Geithner said in a four-page letter. “This means it is necessary for Congress to act by the end of the first quarter of 2011.”
House Speaker John Boehner, R-Ohio, responded with a warning that Republicans will not vote to approve an increase in the debt limit unless the Obama administration and Democrats commit to cutting federal spending. “The American people will not stand for such an increase unless it is accompanied by meaningful action by the president and Congress to cut spending and end the job-killing spending binge in Washington,” he said.
Perhaps anticipating some backlash to the request for an increase, Geithner told Reid: “Never in our history has Congress failed to increase the debt limit when necessary.” He said the failure to do so would cause the Treasury to default on its debt and do “catastrophic damage to the economy, potentially much more harmful than the effects of the financial crisis of 2008 and 2009.”
Geithner listed several government programs that will have to be suspended if the government’s outstanding debt comes close to breaching the limit, including state and local government series securities, Treasury instruments whose maturity dates can be specially tailored to the municipal securities that issuers want to advance refund. Issuers purchase SLGS for advance-refunding escrows so that their investment yields will not exceed their bond yields and violate yield-restriction requirements.
On tax reform, Camp said Wednesday night: “In the 112th Congress, the Ways and Means Committee will focus on developing a simpler and streamlined tax code. I look forward to having a serious and thoughtful dialogue with the American people about broad-based tax reform that will allow families to thrive and employers to create jobs.”
He issued the statement after the Internal Revenue Service’s national taxpayer advocate, Nina Olson, told Congress in her annual report that the most serious problem facing taxpayers and the IRS is the complexity of the federal tax code and that “the time for tax reform is now.”
Howard Gleckman, a resident fellow at The Tax Policy Center, said that while lawmakers probably won’t take action on tax reform this Congress, there will be lots of talk. “If you look at all of the proposals out there, munis are facing a very different world,” he said. Two groups’ recent reports on deficit reform recommended ending the tax exemption for all or some new muni bonds. In addition, lowering the top tax rates would drive down demand for tax-exempt bonds.
But Michael Decker, a managing director and co-head of the municipal division at the Securities Industry and Financial Markets Association, said: “It’s hard to really gauge what the implications are for tax-exempt bonds based on where we are in the process and the statements by various key players. I haven’t heard any members [of Congress] talk seriously about drastically scaling back municipal bonds.”