WASHINGTON – The preservation of tax-exemption has become a key issue for mayors across the country, as they face $1.2 trillion of looming across-the-board sequestration cuts that would drastically reduce federal funding to states and municipalities.

“The preservation of tax-exempt municipal bonds must be upheld,” Columbia, S.C. Mayor Stephen Benjamin said at a U.S. Conference of Mayors’ press conference held Thursday afternoon. “It’s sacrosanct as far as we are concerned. If you mess with tax-exempt muni bonds, you are basically taking away the attractiveness of the capital markets to do anything.”

If tax-exemption is curbed or eliminated, as two deficit reduction commissions have proposed, Benjamin said he isn’t sure what would happen to cities and their ability to issue municipal bonds and invest in infrastructure.

Columbia and the surrounding counties are considering issuing $2 billion of debt to help build their infrastructure, because they know they won’t have funding from the federal government, he said, adding, “We need to preserve tax exemption.”

Philadelphia Mayor Michael Nutter, president of the USCM, echoed Benjamin’s concern about tax-exemption. “If funding is going to dwindle or almost go away by the federal government, we are left on our own and that is our primary funding source,” Nutter said. “Strength in the municipal bond market is really critical for cities.”

Benjamin and Nutter were joined by four other mayors who urged Congress to adopt a bipartisan and balanced approach to deficit reduction by incorporating spending cuts with additional revenue from tax reform, such as closing corporate tax loopholes.

The group released a two-page letter Thursday addressed to Senate and House leaders and signed by 131 mayors, which said the impending sequestration process is “perhaps the biggest threat to our metro economies.”

If Congress doesn’t stop the sequester, it will take effect on Jan. 2, 2013 under a resolution by the Federal Budget Control Act of 2011 because the joint congressional “Super Committee” failed to reduce the deficit by $1.2 trillion over the next 10 years.

As a result, next year alone there would be $110 billion in federal budget cuts and the cuts would total $1.2 trillion over 10 years. 

One-third of the federal budget would see equally divided cuts to non-defense and defense discretionary spending that would affect federal grants, agencies and public and private sector employees. This would force “inevitable cuts” to local services and result in dramatic job losses, the mayors’ letter said.

“As our local metro economies … continue to struggle to recover from the worst national recession in decades, we cannot bear the financial burden that additional discretionary spending cuts would require just to meet the most emergent needs of our constituents,” it said.

Nutter said the mayors will oppose any budget-balancing proposal from Congress that doesn’t include more revenues.  “We believe that new revenues must be put on the table,” he said.

The mayors stressed that they don’t want to wait until after the November elections to discuss sequestration and the federal budget with Congress. “This issue is just too important and that there is too much at risk,” said Atlanta, Ga. Mayor Kasim Reed.  “There are two million jobs at stake.”

“The more important issue for mayors is simply this: we are not going to stand by as cities across the United States and allow the federal government to shift this responsibility to us and go by quietly,” Kasim said. “We will make it known that cuts without revenue aren’t cuts really at the federal level, it will mean that those burdens and responsibilities will go to cities that are already constrained.”

The mayors expressed frustration with Congress’ unwillingness to find a deficit reduction solution, which then shifts the financial burden onto cities. “We are sick and tired of Congress not getting its job done,” said Minneapolis Mayor R.T. Rybak.

The mayors’ complaints followed an analysis from the Pew Center on the States that showed sequestration would have grave consequences for states. Florida, Maryland, Texas, California and Virginia would see the largest gross state product decreases in the next year, according to the Pew Center. California would lose $10.8 billion in GSP and more than 125,000 jobs. Virginia, which heavily depends on federal defense spending, would lose $10.5 billion in GSP loss and more than 122,000 jobs. Florida and Maryland would each be hit with more than $3 billion in GSP losses. Florida is estimated to lose more than 39,000 jobs while Maryland would lose more than 36,000 jobs. Texas is expected to lose $7.9 billion in GSP and nearly 92,000 jobs.

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