Understanding the Comprehensive Tax Reform Proposals before Congress

By Brock, Emily S. | Government Finance Review, August 2016 | Go to article overview

Understanding the Comprehensive Tax Reform Proposals before Congress


Brock, Emily S., Government Finance Review


On November 8, 2016, voters across the United States will not only elect a new president, but also fill 34 Senate seats and all 435 House seats. On the brink of a tumultuous election season, Congress has begun preparing for the next president's term. Moving into the 115th Congress, elected officials are thinking about which proposals will make a significant impact in the post-election season.

Now is the time for state and local governments to make sure Congress understands the issues that are of crucial importance to their communities --such as preserving the tax exemption on municipal bonds. The exemption is an essential tool for jurisdictions across the United States for the creation and maintenance of infrastructure. Despite its importance, however, this tool has frequently been tied to Congressional efforts for comprehensive tax reform. This article describes the comprehensive tax reform proposals before Congress and assesses the possible effects of each proposed reform on the preservation of the municipal bond tax exemption.

PRESERVING THE MUNICIPAL BOND TAX EXEMPTION

Congress and the White House continue to discuss federal tax reform and budget deficit reduction proposals, some of which would repeal the tax exemption. For more than 100 years, GFOA has consistently communicated with congressional leadership about the importance of preserving the municipal bond tax exemption--and in the midst of an uncertain election season, this message has remained consistent. Along with GFOA's sister organizations, we continue to provide comments to key committee members and leadership that highlight two specific areas:

1) preserving this critical public financing tool to promote job creation and improve the nation's infrastructure; and

2) ensuring that state and local governments retain the authority to set their own tax policies.

Under the federal tax code, investors are not required to pay federal income tax on interest earned on most bonds issued by state and local governments. The municipal bond exemption has existed since 1913. It neither a loophole nor a special interest tag-a-long provision, but rather a fundamental component of our nation's intergovernmental cooperation. Municipal bonds, the most important tool in the United States for financing investments in schools, roads, and other vital infrastructure, are a safe and reliable investment. Threatening the tax exemption threatens the ability of state and local governments to provide vital resources and finance the nation's infrastructure needs. That's because muni bonds allow state and local governments to save approximately two percentage points on borrowing costs, which translates into a substantial savings to local taxpayers.

HOUSE COMMITTEES

The House of Representatives started the second session of the 114th Congress in January 2016. The support of a majority of the members of the Ways and Means Committee--where much of the ongoing debate about tax reform has been held--is crucial to any efforts at maintaining the municipal bond tax exemption. This exemption has prevailed for more than 100 years with the continued grassroots support of GFOA members, and we hope the Ways and Means Committee will continue to support of the preservation of the tax exemption in the 115th Congress.

Lately, there has been a good showing of explicit support for preservation of the tax exemption made by members of the House who serve on the Committee and beyond. For example, in an initiative led by Rep. Hultgren (R-IL) and Rep. Ruppersberger (D-MD) and prompted by President Obama's Fiscal Year 2016 Budget Proposal, which capped the tax deduction for municipal bonds at 28 percent, 124 members of the House came together on April 15, 2015 to draft a response letter in favor of the tax exemption. (1) The letter states:

"Now is the time to invest in America.... Eliminating or capping the current deduction on municipal bonds would severely curtail state and local governments' ability to invest in themselves. …

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