WASHINGTON — Preserving tax exemption for municipal bonds is a top priority for states, governors said Wednesday.

Delaware Gov. Jack Markell and Oklahoma Gov. Mary Fallon outlined states' top priorities in the first annual State of the States address here on behalf of the National Governors Association.

"Governors in both parties have long taken a lead role in advocating for additional infrastructure investment at a time when truly our investments in this country are falling way behind the infrastructure investments of so many other countries," said Markell, NGA chairman. "That's why it's important to our taxpayers that the nation protect tax-exempt financing for infrastructure and the deductibility for state and local taxes, which can provide critical support to infrastructure projects."

Markell added that long-term federal funding stability is extremely important to governors as they have employed "innovative financing tools including public, private partnerships to help mitigate the public funding shortfalls and also to shore up some of our infrastructure."

The flexibility at the state level to make investments in infrastructure projects through existing and new self-sustaining financing mechanisms is also of great importance to states, Markell said.

Markell and Fallon also warned lawmakers that uncertainty surrounding the upcoming debt ceiling and sequestration debates could harm their budgets and adversely affect job creation.

"Our economies are tightly linked to the national economy," Markell said. "As a result, our states' prosperity depends, in no small measure, on the ability of our public servants in Washington to come to terms on a path forward."

Fallon, a Republican, said the uncertainty around the fiscal crises makes it difficult for states to write budgets because they constantly have to be adjusted based on last-minute laws from Capitol Hill.

"That uncertainty hurts our economy, it hurts our jobs," added Fallon, NGA vice chair. "It doesn't help us when we are trying to plan the different services that we need to deliver in our states."

Fallon highlighted four points governors have asked President Obama and Congress to keep in mind when addressing deficit reduction and sequestration.

They are: federal reforms should produce savings for both the federal government and states; deficit reduction should not be accomplished by merely shifting costs to states or imposing unfunded mandates; states should be given increased flexibility to create efficiencies and achieve results; and Congress should not impose "maintenance-of-effort" provisions on states as a condition of funding.

Fallon stressed that states "need to be treated as partners, not underlings" when it comes to deficit reduction and other public policy measures. She said it's important that states have a seat at the table with leaders in Washington as they make important policy decisions.

One of the largest uncertainties for governors is the federal tax code, Markell said. The NGA has created a tax reform task force headed by Pennsylvania Gov. Tom Corbett and Kentucky Gov. Steve Beshear. The group will make recommendations suggestions consistent with the interests of the state and federal governments intersect.

The task force, part of the NGA's Economic Development and Commerce Committee, will try to find common ground on tax policy issues among the governors, look at best practices, and then ensure the group communicates its concerns effectively to the president and congressional leaders.

Markell said recent meetings with Obama and House Speaker John Boehner, R-Ohio., and Senate Majority Leader Harry Reid, D-Nev., were productive. All of the leaders were receptive to the governors' concerns, he said.

"The tax reform piece of this recognizes this is something that is likely to come," Markell said. "We want to make sure we have an opportunity to weigh in and let the folks in Washington, those who are making decisions, understand what the impact would be on states."

Another top priority for governors is for Congress to enact an online sales tax. "Treating all sales the same is an issue of fairness that Congress can resolve and should resolve," Markell said.

In recent months state and local groups have heavily lobbied Congress to pass an online sales tax. Senators are expected to reintroduce an online sales tax bill, the Marketplace Fairness Act, early this year.

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