WASHINGTON — Five groups representing local governments are urging Senate Finance Committee leaders to maintain the federal tax-exemption for municipal bonds, ensure states and localities retain the authority to set their own tax policies, and refrain from preempting governments and threatening their fiscal health by granting preferential tax treatment to certain industries.

Separately, 25 muni market groups urged committee leaders to maintain the tax-exempt status of muni bonds, claiming they are a vital low-cost financing tool for development of infrastructure, schools and affordable housing needs.

The groups made their pleas in two separate letters sent just before Wednesday’s Senate Finance Committee hearing and how tax reform affects state and local government fiscal policy.

The seven-page letter from local groups was sent by Governmental Finance Officers Association, National League of Cities, U.S. Conference of Mayors, National Association of Counties and the International City-County Management Association to committee chairman Sen. Max Baucus, D-Mont., and ranking minority member Sen. Orrin Hatch, R-Utah.

As Congress considers comprehensive tax reform and local governments continue to experience declining revenues, the five groups called on lawmakers to immediately pass the Market Place Fairness Act in order to “promote the intergovernmental partnership by authorizing the collection of local taxes already owed on Internet and mail-order sales.”

The Market Place Fairness Act, introduced by Sen. Mike Enzi, R-Wyo., in 2011, offers states the option of collecting the sales taxes they are owed under current law from out-of-state businesses, rather than relying on consumers to pay those taxes to the states.

Generally, states have been blocked from requiring Internet retailers overall to collect sales taxes by a 1992 Supreme Court decision in Quill Corp. v. North Dakota. In that case, the high court ruled that state could not impose a tax on Quill because the office supply retailer did not have any physical presence in North Dakota.

The court’s reasoning was based partly on the concern that there are thousands of separate sales tax jurisdictions that if they adopt varying tax requirements, this could severely restrict interstate commerce.

The groups also strongly urged lawmakers to “consider the impact any [tax] changes will have on critical infrastructure that residents in all local communities have come to depend on,” arguing that the elimination of tax-exempt muni bonds would significantly increase costs to taxpayers. It would also “force local governments to delay the financing of essential projects that create jobs and economic growth,” they said.

The American Society of Civil Engineers estimates that it will cost state and local governments $2.2 trillion over the next five years to meet physical infrastructure needs. “The only logical way for the federal government to be a partner in infrastructure funding is by supporting the tax-exemption of municipal securities,” the groups wrote. “When infrastructure demands are great, yet direct federal assistance to state and local governments is shrinking, the ability of states and localities to issue tax-exempt bonds becomes more significant.”

They asked lawmakers to adopt reforms that will allow local governments to retain authority over their own tax policy and maintain the deductibility of personal state and local property, sales and income taxes on federal tax returns. The 25 groups warned the lawmakers that, “Maintaining the tax-exempt status of municipal bonds is essential to help our national economy grow, create jobs and best serve the constituencies of every community.”

“Tax-exempt financing is a well-established market providing a cost-effective mechanism for financing infrastructure and meeting needs of our citizens. Any changes that would replace, compromise, dampen or eliminate tax-exempt financing immediately or retroactively, particularly those offered as deficit alternatives, should be carefully and cautiously analyzed by the committee,” they wrote.

“It appears as though there are many issues that the committee will be covering that matter to local governments,” said Tim Firestine, Montgomery County, Md.’s chief administrative officer. “This is especially true as Congress looks at federal tax reform, and its implications on the tax-exempt bond market.  It is imperative for Congress to maintain the exemption and not act in a way that would increase costs for local governments, and ultimately taxpayers.”

Meanwhile, congressional aides at the National Council of State Housing Agencies legislative conference on Tuesday spoke about the need to extend a handful of expiring tax provisions, including the alternative minimum tax. Representing Republican and Democratic members from the House Ways and Means Committee and the Senate Finance Committee, they said during a panel discussion that they expect consideration of extending expiring or expired tax provisions will be pushed into an active lame-duck session after the November election.

“It’s going to be tough slog,” said one aide, asking not to be named. “You can never start too early in terms of getting the work done and figuring out what we are going to do.”

On Thursday, Ways and Means will hold the first in a series of hearings to examine the array of expiring tax provisions and tax expenditures, including tax-exempt municipal bond interest.

“We will try and set up the discussion about reviewing the tax extenders in a smart manner to find out if there is some efficiency to gain from these things and whether they deserve a true public policy goal,” the aide said. “These extenders have piled up over the last 10 years. Ten years ago we had about 40, now we have about 150. I think leaders from both chambers think it’s well overdue to review these things.”

Congress passed a two-year extension of extenders in 2010. If President Obama is re-elected, it could look like 2010 again, the aide said.

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