Magazine article Government Finance Review

Protecting Tax-Exempt Bonds and Tax Incentives: A Recent Appeals Court Decision and the Ongoing Debate over Tax Reform at the Federal Level Have Raised Serious Concerns in the Public Finance Community about the Future of Tax Incentives and Tax-Exempt Bonds

Magazine article Government Finance Review

Protecting Tax-Exempt Bonds and Tax Incentives: A Recent Appeals Court Decision and the Ongoing Debate over Tax Reform at the Federal Level Have Raised Serious Concerns in the Public Finance Community about the Future of Tax Incentives and Tax-Exempt Bonds

Article excerpt

Building infrastructure and attracting business are two of the most basic objectives of local governments. For many years, tax-exempt debt and tax incentives have been the primary tools for achieving these objectives. Understandably, recent developments at the federal level have raised concern among local governments about the future viability of these important tools. This article summarizes the efforts to undermine tax-exempt bonds and tax incentives, as well as the response from the local government community and its supporters.

TAX-EXEMPT BONDS

There are two major initiatives in the works regarding tax-exempt bonds that are of interest to state and local governments. First, President Bush in January formed a bipartisan panel to "advise on options to reform the tax code to make it simpler, fairer, and more pro-growth to benefit all Americans." The Advisory Panel on Federal Tax Reform is to submit to the Secretary of the Treasury a report containing revenue-neutral options for reforming the federal tax code as soon as practicable but no later than September 30. Second, the Joint Committee on Taxation released in January a report entitled Options to Improve Tax Compliance and Reform Tax Expenditures. The report contains eight provisions that would impact the tax-exempt bond sector.

Advisory Panel. The president's Advisory Panel on Federal Tax Reform has met 10 times since its formation in January. The advisory panel has heard various witnesses and studied data on many issues affecting individual and corporate tax payers. One meeting focused on issues of direct concern to GFOA members--How the Tax Code Interacts with State and Local Tax Systems. This hearing provided a history of state and local tax laws and how they are intertwined with the federal system. Panelists highlighted several key issues, such as the need to preserve the deductions for state and local property, income, and sales taxes; the importance of the sales tax--and the need to collect taxes on remote sales--and the interrelationship between the federal tax system and state and local tax systems.

Tim Firestine, CFO of Montgomery County, Maryland, and vice chair of GFOA's Committee on Governmental Debt Management addressed the panel on behalf of local governments. His testimony centered around the importance of the deductions for state and local income, sales, and property taxes and the impact of federal tax reform on the tax-exempt bond market. Firestine emphasized the importance of the tax-exempt bond market and explained that eliminating or altering the existing income tax system would have grave implications on state and local finances. He added that the panel should not make an alteration to the current tax-exemption for municipal bonds. In addition to Firestine's oral testimony, GFOA submitted comments to the panel on the importance of the tax-exempt bond market, the need to understand state and local finances, and suggestions for simplifying the tax code that would benefit local and state governments.

Report. At the request of Senate Finance Committee Chair Chuck Grassley (R-Iowa) and Ranking Member Max Baucus (D-Montana), the Joint Committee on Taxation wrote a 400-page report containing recommended tax reform measures for Congress to review. The eight tax-exempt bond provisions would cause great disruption and additional costs to issuers of tax-exempt bonds. GFOA has written letters to both the House and Senate stating our opposition to these provisions. The letters can be found on the GFOA Web site at http://www.gfoa.org/flc/.

Among the provisions of most concern to state and local governments are the following:

Eliminate advance refunding of governmental and 501(c)(3) bonds. The proposal would not allow issuers to have an advance refunding opportunity on future bonds, thus eliminating a powerful tool used by state and local governments to minimize financing costs. Currently, issuers are allowed to advance refund a bond once during the lifetime of their bonds. …

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