NAMA executive director Susan Gaffney
NAMA executive director Susan Gaffney

WASHINGTON — State and local government groups have combined forces with dealers, bond lawyers and representatives from energy, education and other sectors to deliver a strong message to the joint congressional deficit-reduction committee: hands off our tax-exempt financing.

Twenty-two members of the municipal market groups sent a letter to the 12 members of the Joint Select Committee on Deficit Reduction, urging them to continue “support and commitment” for tax-exempt bond financing. The letter was sent to committee members one day before they met for the first time on Thursday.

For months, state and local government groups have been ramping up defensive strategies to prevent their tax-exemption from getting swept up in the tax reform and deficit-reduction deliberations in Washington. The letter shows the magnitude of concern among muni market groups about the future of tax-exempt bonds.

“In a world in which there are likely reductions to domestic discretionary and perhaps even mandatory and entitlement spending, it is critical that this tool be preserved in order for us to protect our investments,” said Michael Bird, federal affairs counsel for the National Counsel of State Legislatures.

“NCSL truly understands that if you are going to do serious deficit reduction and debt-management control, we are going to have to make a contribution to that reduction, and since federal funding will therefore diminish potentially in the future, the retention of tax-exempt financing becomes all that more important,” Bird said.

Tax-exempt municipal bonds have come under fire as calls for deficit reduction and tax reform heat up. Many recommendations for federal savings have criticized the tax-exemption as an inefficient tax expenditure.

President Obama’s National Commission on Fiscal Responsibility and Reform — which released recommendations last November that have been cited as a blueprint by Republicans in Congress and presidential candidates — included the idea of denying tax-exemption to new muni bonds in an “illustrative proposal” in its report.

The Bipartisan Policy Center’s debt reduction task force issued a report in November calling for denying tax-exemption to new private-activity bonds such as single-family housing bonds, hospital bonds, and small-issue industrial development bonds. 

The muni group officials who helped craft the letter agreed the deficit commission’s report was a clear shot across the bow, and that municipal bond supporters needed to jump into action.

Tax-exemption “is going to be on the table” among expenditures the so-called super committee is likely to consider for cuts, according to Larry Jones, assistant executive director for the U.S. Conference of Mayors. The worry, he said, is that tax-exemption could get bundled with other federal tax expenditures.

As a cost to the federal government, the tax-exemption ranks well below other major tax expenditures.

In an April report, Standish Mellon Asset Management Co., a division of the Bank of New York Mellon, cited Joint Tax Committee data from December showing that tax-exemption ranks ninth among the top 10 federal tax expenditures with a cost of about $200 billion from 2010 through 2014.

Employer health care contributions will cost the federal government about $650 billion and the home mortgage interest deduction will cost nearly $500 billion during the same period, the data showed.

The tax-exemption has also been threatened by calls for tax reform, independent of the deficit reduction deliberations. Sens. Ron Wyden, D-Ore., and Dan Coats, R-Ind., introduced tax-reform legislation in April that would make all new munis tax-credit, instead of tax-exempt, bonds.

Though the deficit reduction committee is not likely to attempt broad tax reform in the short time it has until Nov. 23 when its legislative recommendations are due, sources said enough uncertainty exists that the importance of tax-exemption needs to be emphasized.

“Nobody knows exactly what they are going to do,” said Charles Samuels, who represents the National Association of Health & Higher Education Facilities Authorities. Tax credit- and direct-pay bonds would be “problematic ... substitutes for tax-exempt bonds,” he said. “We have to be on our guard and proactive.”

Other officials said the letter establishes a defensive stance ahead of an expected larger tax-reform discussion in the near future.

“It is likely to be both a sprint and a marathon as we prepare to preserve the tax-exemption,” said Susan Gaffney, director of the Government Finance Officers Association’s federal liaison center. When “the likelihood of full-blown tax reform comes down the road, much like in 1986, the [bond] community is ready to stand firm against any changes to the tax exemption,” she said.

One group absent from the letter was the National Governors Association. Spokeswoman Jodi Omear said Thursday that the NGA has worked with the other groups on the tax-exemption issue.

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