SAN ANTONIO — State and local governments must rally to defend the federal tax exemption for munis, a market expert warned Thursday, saying only they can persuade members of Congress about its importance.
The remarks came at the National Association of Bond Lawyers’ Bond attorneys’ workshop here, during a panel entitled “Tax Reform Update.”
Two recent proposals by the Obama administration — the American Jobs Act, which was modified but failed to move forward in the Senate last week, and a draft Plan for Economic Growth and Deficit Reduction — have raised concerns about whether the value of tax-exempt interest could be reduced to 28% or varying annual levels, some of which could be even lower.
“We have an enormous battle on our hands,” said George Friedlander, chief municipal strategist at Citi. “And the only tools we have to fight it are our state and local elected authorities.”
The good news, Friedlander said, is that the president’s proposal awakened the issuer community.
On the other hand, if state and local governments do not prioritize defending the exemption, and explaining its role in promoting low-cost access to the capital markets, muni borrowing will collapse from its “already paltry” levels, he said.
One lobbying challenge, Friedlander noted, is members of Congress from both parties who harbor doubts about the tax exemption. Democrats tend to view it as a subsidy for the wealthy and Republicans believe borrowing is used to paper over debts — though that is not the case, Friedlander said.
In addition, he said, not all market participants have the potential to persuade elected officials.
“Nobody wants to hear from bond lawyers,” Friedlander said. “Nobody wants to hear from investment bankers. Nobody wants to hear from advisors to the wealthy.”
In an interview, Friedlander said bond attorneys, who have contacts with issuer clients and the press in their communities, could play a role in defending the tax exemption.
Still, if state and local governments fail to mobilize, he said: “We’re dead.”
In a speech on Wednesday, NABL president Kristin H.R. Franceschi, a partner at DLA Piper LLP in Baltimore, said state and local governments might feel constrained to express their views publicly about legislative proposals to curtail the tax exemption.
In particular, she said, they may feel “they have more to gain from the other stimulus and jobs money at risk in the same legislative package.”
Franceschi said NABL will continue to educate its members about legislative proposals that could affect the muni market and support efforts by other market participants to educate members of Congress about the consequences of such reform.