Magazine article Government Finance Review

GFOA Works to Preserve Muni Tax Exemption, Protect State and Local Pension Authority

Magazine article Government Finance Review

GFOA Works to Preserve Muni Tax Exemption, Protect State and Local Pension Authority

Article excerpt

A busy federal legislative and regulatory schedule is set to unfold this summer, making this a good time to review the GFOA's progress in advocating for federal priorities that benefit state and local governments. Working to preserve the tax exemption on municipal bond interest is of particular importance, along with protecting state and local authority over public pension plans--including the GFOA's work with other state and local organizations on pension funding policies.

TAX EXEMPTION ON MUNICIPAL BOND INTEREST

The GFOA opposes federal proposals that would reduce or repeal the tax exemption on municipal bond interest. The GFOA's advocacy efforts increased in both size and scope following Congress' December 2012 approval of the American Taxpayer Relief Act, legislation designed to temporarily avert the simultaneous increase in tax rates and decrease in government spending known as the fiscal cliff. The package did not include provisions to cap the exemption of tax-exempt municipal bond interest at 28 percent, as lawmakers discussed earlier in 2012, but federal lawmakers did express a desire to revisit this proposal in 2013, when Congress and the White House were scheduled to renew discussions on comprehensive tax reform and budget deficit reduction.

As the year began, the GFOA regrouped with its state and local government partners to conduct targeted meetings with staff from House and Senate committees to discuss the critical need for maintaining the exemption and the significant cost increases that would result if the exemption were capped or repealed, as some federal proposals advised. These meetings were accompanied by a series of joint state and local government association letters expressing these same sentiments, clarifying the demographic identity of municipal investors and laying out the core arguments for retaining the exemption, which are as follows:

* The municipal tax exemption has been a successful cornerstone of state and local infrastructure development for more than 100 years and is responsible for financing a majority of the nation's infrastructure. These projects could not be funded by other means.

* Proposals to cap the exemption would introduce uncertainty into the municipal market, which has a long history of reliability. Such a change would cause investors to fear additional federal intervention in the market where none has existed previously.

* Investor concerns translate into demands for higher yields from state and local governments, which mean increased financing costs. If jurisdictions are not able to satisfy investor yield demands, needed infrastructure projects will not move forward, or the costs of these projects will be passed on directly to state and local taxpayers.

The GFOA, along with the U.S. Conference of Mayors, National League of Cities, and National Association of Counties, released a joint report titled Protecting Bonds to Save Infrastructure and Jobs 2013. The report, released in February 2013, supports arguments against both the proposals that have been advanced--capping the exemption on municipal bonds at 28 percent, or eliminating the exemption entirely--and explained the ways state and local governments use municipal bonds. One revelation: If the proposal to cap the muni bond exemption had been in place over the last 10 years, it would have cost state and local governments an additional $173 billion in interest costs. A total repeal of the exemption over the same time period would have cost state and local governments more than $495 billion. The report also includes individual cost-impact data from 32 pre-selected cities and counties from across the country. GFOA President-Elect Tim Firestine discussed these figures at a February press conference, and in March and April, the GFOA worked with NACo to collect similar data on 106 additional counties in targeted congressional districts to assist our campaign efforts. …

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