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Tax-exempt status of municipal bonds is threatened by 'fiscal cliff' proposal

From the December 20, 2012 issue of Public Power Daily

Originally published December 20, 2012

By Jeannine Anderson

APPA has learned that President Barrack Obama, in his current counter-offer in the "fiscal cliff" negotiations, has proposed the immediate enactment of a 28 percent cap on the tax value of deductions and exclusions, including the exclusion for municipal bond interest.

According to one description, the cap would take effect on Jan. 1, 2014, serving both as a failsafe if Congress fails to enact tax reform legislation in 2013 and as an incentive to affected interest groups (who will work to enact tax reform so as to mitigate the damage done by the pending 28 percent cap).

In an earlier proposal, President Obama had suggested the cap as a possible revenue source during the tax reform debate in 2013. If reports are accurate, the latest proposal would appear to increase the threat posed to municipal bonds by requiring Congress to act to avoid imposition of the cap.

The White House, and then congressional Republicans, leaked details of the proposal early this week after House Speaker John Boehner, R-Ohio, told President Obama that while he intended to continue negotiations, he would also begin "Plan B" in the House. Boehner said he wants the House to pass legislation that would extend the 2001 and 2003 income tax rate cuts for all income below $1 million. The president has proposed an extension for income below $250,000 and, in his latest offer, raised that to income below $400,000. If the speaker can get approval for the approach from his fellow House Republicans, the matter could come to a vote in the House as early as today (Thursday).

APPA strongly opposes repealing or altering the current tax-exempt status of municipal bonds. The association joined 19 other state and local government associations early this month in signing an op-ed in Politico defending the current tax treatment of municipal bonds. The opinion piece, written by Timothy Firestine, the chief administrative officer of Montgomery County, Md., makes the case that taxing municipal bonds would overturn a century of precedent and increase the cost of infrastructure investments. (See the Dec. 10 Public Power Daily.)

"Repealing, replacing or limiting the tax exemption on municipal bond interest would cause governments -- and taxpayers -- to pay more for their infrastructure needs," Firestine wrote. "This would result in higher taxes and fees, which translates into less infrastructure investment, fewer jobs and higher costs to states and localities that are already under fiscal stress."

Proposals to cap tax deductions as a means to raise revenue "may appear innocuous on the surface," wrote Paul Fisk, mayor of Lodi, Wis., in a Dec. 4 letter to members of Congress from Wisconsin. In fact, though, "such a cap could have a grave effect on the city of Lodi and our publicly owned electric utility, Lodi Utilities," he said.

Like all state and local governments, Lodi Utilities relies on tax-exempt bonds to finance infrastructure improvements, he said. "At the levels being discussed, a cap on deductions -- if it were to include the current exclusion of interest on municipal bonds -- would effectively impose a federal tax on most, if not all, state and local bond interest paid to individuals." Such a tax "would severely reduce our city's and our utility's ability to finance infrastructure investments," Mayor Fisk said. "The goal of federal deficit reduction is laudable, but we call on Congress to reject any proposal that would balance the federal budget on the backs of state and local governments and  -- by extension -- our citizens and ratepayers."

Fisk's letter and a number of similar letters from city officials in public power communities are posted on APPA's website.

APPA is encouraging public power utilities and locally elected officials to contact their members of Congress to explain how proposals to cap exemptions at 28 percent would hurt their ability to get the financing needed to build infrastructure.

In October, the chief of staff of the Joint Committee on Taxation drafted a plan that would tax interest on municipal bonds (see the Oct. 19 Public Power Daily).


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