WASHINGTON – Municipal bond groups are again urging lawmakers taking up tax reform to maintain the tax exemption for municipal securities.

They made their requests in letters sent this month to Senate Finance Committee Chairman Orrin Hatch, R-Utah.

Two dealer groups -- the Securities Industry and Financial Markets Association and Bond Dealers of America -- also pressed the lawmakers to expand the use of private activity bonds so that they can more easily be used for infrastructure projects that involve private parties. SIFMA also suggested a tax credit be provided to equity investors involved in such projects.

In addition, SIFMA urged the lawmakers to reinstate direct-pay bonds, such as the Build America Bonds, under which state and local governments can issue taxable bonds and receive a subsidy payment equal to a percentage of their interest costs from the Treasury Dept. SIFMA stressed that these bonds should not be subject to sequestration.

SIFMA also said, “ The tax exemption is better than direct subsidies for infrastructure investment because bonds must be repaid, forcing a market test of the project’s viability.’’

State and local officials highlighted the importance of the retaining the federal deduction for state and local taxes known as SALT to their communities’ fiscal health.

Sen. Orrin Hatch, R-Utah
Sen. Orrin Hatch, R-Utah Bloomberg News

The deadline for responses to the Utah Republican’s request for suggestions on tax reform was Monday.

A coalition of 26 national organizations led by the National Governors Association and the U.S. Conference of Mayors submitted a joint letter advocating retaining both tax-exemption and the SALT deduction.

Also included in that coalition were the National Association of State Treasurers, the National Association of Counties and the National League of Cities.

“Tax-exempt municipal bonds have financed more than $2 trillion in new infrastructure investments over the past 10 years and are on a path to finance another $2 trillion in the next ten years,’’ the groups wrote. “They are the best way to implement the infrastructure needs of each community effectively.’’

The groups also suggested two changes in muni tax laws to increase investment in infrastructure.

“Modifying the two-percent de minimus rule would allow financial institutions to hold up to 2% of their assets in tax exempt obligations issued without full reduction of their attributable interest expense deductions,’’ their letter said.

The other suggestion was to increase the bank-qualified debt limit to $30 million from $10 million and index that to inflation.

The federal deduction for state and local taxes, meanwhile, was claimed by “well over 100 million Americans’’ in the 2014 tax year, the letter said.

“Additionally, more than 50% of the total amount of the SALT deduction went to taxpayers with adjusted gross incomes (AGI) under $200,000,’’ the governors, mayors and other groups said,

Hatch appears to have received more than 420,000 comment letters between his June 16 request and the July 17 deadline for input from “experts and stakeholders.’’

Many of the emails came from individuals who participated in a lobbying push by a coalition of 22 politically liberal organizations led by Americans for Tax Fairness, Daily Kos and CREDO. That group estimates it generated 390,000 letters. Another politically liberal group led by Tax March and Stand Up America sent in an estimated 32,000 comment letters.

The Senate Finance Committee did not release an estimate of how many comments it received although a spokeswoman said in an email it received “hundreds of thousands.’’

Hatch has said he does not plan to publicly release the comments, in contrast to two years ago when the same committee solicited comments after forming bipartisan working groups of members to make recommendations on various parts of tax reform. That effort in 2015 also drew comments from muni and state and local groups who wanted to retain the tax exemption for munis and SALT deduction.

Several of those groups sent copies of their new comments to The Bond Buyer and a few also sent copies to congressional Democrats. Although one Democratic staffer said Democrats on the committee are being excluded from access to the tax reform letters not being sent to them.

At a Tuesday hearing on tax reform, Hatch declined to commit to holding a public hearing on the any forthcoming tax reform legislation being finalized by the White House and top congressional Republicans.

“I would like to; I don’t know,’’ Hatch answered when publicly questioned by Democratic Sen. Claire McCaskill of Missouri, adding, “I’m not going to say I’m going to, but I would prefer it.’’ Hatch is one of the so-called Big Six negotiators – all Republicans -- who include lawmakers from each chamber and two administration officials.

Senate Majority Leader Mitch McConnell of Kentucky, House Speaker Paul Ryan of Wisconsin, House Ways and Means Committee Chairman Kevin Brady of Texas, National Economic Council Director Gary Cohn and Treasury Secretary Steven Mnuchin also are part of the group negotiating the more detailed legislation.

The bill those six hammer out may be voted on in the House and Senate without public hearings because Republicans are preparing a budget resolution as a prelude to reconciliation legislation that would prevent a Senate filibuster and require only a simple majority vote in the Senate rather than the 60 votes usually required to approve most legislation.

Andrew Brady, senior director of government affairs for the American Public Transportation Association, told The Bond Buyer, “It certainly will be hard to ignore the broad-based coalition of support for the tax treatment of municipal bonds.’’

The committee also heard from the Municipal Bonds for America Coalition, which represents 23 national organizations ranging from the American Public Power Association to the Bond Dealers of America and the National League of Cities, cities utilities, and airports. The group, chaired by Mayor Stephen Benjamin of Columbia, S.C., submitted one main letter and several attached related ones.

“Between 2000 and 2014, the tax exemption saved state and local governments an estimated $714 billion in additional interest costs,’’ the coalition letter said. “Without the tax-exemption, state and local governments would pay more to raise capital — a cost that ultimately would be borne by taxpayers, through higher taxes — or be forced to reduce infrastructure spending.’’

The letter also detailed the extent to which tax-exempt bonds have been used and have provided benefits in each sector of the muni market as well as for public-private partnerships.

Some members of the coalition also submitted separate letters.

Mayor Ben McAdams of Salt Lake County in Hatch’s home state of Utah co-authored a letter calling the preservation of the tax-exempt status of municipal bonds “a top priority’’ to the county’s residents.

Amy Rowland, Utah director of the National Development Council, wrote that current construction projects being financed with tax-exempt bonds “include the new Salt Lake International Airport, two new Salt Lake County Public Health Clinics, the new Salt Lake County District Attorney’s offices and many, many additional valuable public projects.’’

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