Sınce the Great Recessıon, lawmakers ın the natıon’s
capital have struggled to fi nd ways to solve the enigma
that is the federal debt and defi cit. Th ere have been countless
committees, commissions and bipartisan groups that
have put forth numerous proposals that are billed as the
right plan to put our nation’s fi scal house back in order.
But one proposal that continues to produce much concern for
state and local governments is one that seeks to limit or cap the
value of certain tax benefi ts, including tax-exempt interest on
municipal bonds. Th is proposal is troublesome for not only the
long-standing history of the muni-interest exemption it would alter,
but also because of the detrimental impact it would have on infrastructure
investment.
Since the original income tax code of 1913, the interest earned
on municipal bonds has been exempt from federal income tax. Th is,
in large part, is an acknowledgement of the partnership between
federal, state and local governments and their respective roles in
developing our nation’s infrastructure.
Th e impact of municipal bonds is substantial. During the period
from 2003–12, municipal bonds fi nanced more than $1.65 trillion of
infrastructure investment. With state and local governments providing
the funding for more than 75 percent of our nation’s infrastructure,
there is no other funding mechanism that could match the return for
the federal government’s dollar that produces such a compelling
amount of infrastructure, and ultimately jobs.
But now, as many of the policymakers in Washington
continue to search for ways to generate
revenue, the idea of reversing history and
partially taxing what is otherwise exempt
income has emerged over the past few years.
Th e idea fi rst surfaced in 2010 as part of the Simpson-Bowles
plan, which would have eliminated the tax-exemption for municipal
bond interest. Since then, variations of that proposal have
appeared in legislation and budget plans.
Th e most recent proposal including language that could
impact municipal bonds was the president’s FY 2016 Budget
Plan, as it reiterates what the three prior proposals included,
a 28-percent cap on certain tax benefi ts, including interest
earned on municipal bonds. While the plan itself is generally
a nonstarter in the budget process, it still can serve
as a base for future talks. It should be noted that in addition to the
president’s proposal, language was included in the FY 2014 Senate
Budget Resolution that suggested the possibility of a cap on tax benefi
ts, which could include tax-exempt interest.
In addition, now that we are in the 114th Congress, we can expect
the tax-writing committees in both chambers to resume the work
that was started in prior sessions. We’ll take a brief look at what that
previous work entailed, review where we are today and talk a little
about what we can expect looking ahead.
In February 2013, under then-Chairman Dave Camp (R-Mich.),
the House Committee on Ways and Means created 11 tax reform
working groups. Each group focused on exploring reform options in
a particular tax area, like manufacturing and real estate.
Th ere was no one specifi c working group assigned for municipal
bonds, but the full committee held a hearing in March 2013 titled
“Tax reform and tax provisions aff ecting state and local government.”
A substantial amount of the hearing was spent discussing the exemption
for municipal bond interest, and there appeared to be a solid,
albeit small, base of committee members at the time that supported
maintaining the exemption.
On the other side of the Capitol, under then-Chairman Max
Baucus (D-Mont.), the Senate Finance Committee began a multiweek
discussion series where members convened to talk about
specifi c topics and provide feedback on options to enact tax reform.
After each meeting, the tax reform option papers used to guide the
discussions were posted on the committee’s website. All tax reform
options, including capping tax benefi ts like the exemption for municipal
bond interest, were discussed.
However, there were some positive developments in the 113th
Congress; 14 Democratic senators sent a letter to the president urging
him to preserve the tax-exemption for municipal bonds and then-
House Majority Leader Eric Cantor (R-Va.) publicly stated
he supported maintaining the tax-exempt status of
municipal bonds.
Also in the 113th, a bipartisan resolution in
the House was introduced (H.Res.112) celebrating
and acknowledging the importance of
tax-exempt bonds. Additionally, a bipartisan
letter with over 130 representatives signed on supporting
the tax exemption for municipal bond interest was sent to House
Speaker John Boehner (R-Ohio) and Democratic Leader Nancy
Pelosi (D-Calif.).
Now, fast forward to the 114th Congress, one can readily see
how the dynamics have changed since the midterm elections
in November 2014. To start, both tax writing committees in
Congress are now under new leadership. In the House, the
Ways and Means Committee is led by former Budget Chair
Paul Ryan (R-Wis.). In the Senate, with the Republican takeover of the chamber, the Finance Committee gavel is now held
by Senator Orrin Hatch (R-Utah). With the start of their chairmanships,
each will likely want to put their own respective mark in any
comprehensive tax reform process.
Th e Senate Finance Committee was the fi rst to move this time around
as Chairman Hatch and Ranking Member Ron Wyden (D-Ore.) created
working groups among committee members to explore diff erent areas
of the tax code. Th e working groups recently closed a public comment
period in which they sought feedback from any interested party on
possible approaches to reforming the tax code. Potentially
using some of the public feedback received, each
working group is now tasked with developing recommendations
on how to reform the code in its
specifi c area.
Although it remains to be seen what the
fi rst step for the House Ways and Means
Committee will be in this process, we
have already seen some positive movement
in the House. Municipal bond
supporters once again successfully sent a
bipartisan letter with over 120 representatives
signed on to House leadership urging
support for the exemption.
Th e bottom-line for state and local governments is that if history
can properly serve as our guide, tax reform will be a multiyear process
and not something that can happen overnight. Added into this
mix is that Congress, despite Republicans controlling both chambers,
still faces an uphill battle on any legislation it hopes to enact
into law. Th e need for comprehensive tax reform enjoys wide bipartisan
support; the path to get there is where disagreement is found in
abundance. Further compounding this mix is that other issues, like
how to solve the problem of transportation funding, will inevitably
involve a discussion on tax reform given that the federal
revenue side of the equation needs to be substantially
addressed in order to get anywhere close on a
long-term solution.
Th erefore, for state and local offi cials, the
work is far from being over. Members of Congress
need to be reminded the tax-exemption
has helped state and local governments
pay for a majority of our country’s infrastructure
over the past century. It has
survived two world wars, the Great Depression
and the Great Recession — all times of
fi scal challenge, yet the exemption continues to
work for small and large governments alike.