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White House proposed budget would result in 'huge tax increase' for Americans, APPA says


From the April 12, 2013 issue of Public Power Daily

Originally published April 12, 2013

By Jeannine Anderson
Editor
President Obama's budget proposal to Congress for fiscal year 2014 would impose a surtax on municipal bond interest that, if enacted, would amount to a large tax increase for Americans -- not just the wealthiest Americans mentioned by the budget plan, APPA said this week.

The proposed budget would limit the tax rate at which taxpayers can reduce their tax liability to a maximum of 28 percent, according to the budget plan. This limit would apply to tax-exempt interest on municipal bonds; as well as to itemized deductions; employer-sponsored health insurance; foreign excluded income; retirement contributions; and selected above-the-line deductions. The White House said the limitation would affect only the top 3 percent of families in 2014.

If approved, though, the cap would affect many, if not virtually all, Americans — not just the wealthier Americans who buy bonds — because it would raise cities' costs for anything requiring municipal bonds. 

"Coupled with the damage that will be done to the value of current bond holdings, this proposal – at least in so far as it is applied to municipal bonds – would be a huge tax increase for all Americans of all income levels," said APPA spokesman Nick Braden.

The budget plan portrays the proposed limitation on tax-exempt bonds as affecting the top 3 percent of income earners. 

"Currently, a millionaire who contributes to charity or deducts a dollar of mortgage interest enjoys a deduction that is more than twice as generous as that for a middle class family," the budget document says. "The budget would limit the tax rate at which high-income earners can reduce their tax liability to a maximum of 28 percent, a limitation that would affect only the top three percent of families in 2014." It would apply to taxpayers in the 33 percent, 35 percent and 39.6 percent tax brackets.

A 28 percent cap "would essentially drive down the appeal of municipal bonds," and "risks pushing up the borrowing costs for state and local governments that use the bonds to finance bridges, roads and other capital projects," Reuters reported April 10. 

The 28 percent cap "would significantly increase financing costs for state and local governments and force them to reduce infrastructure projects while permanently damaging the muni market," The Bond Buyer reported.

Any change to the traditional tax-exempt treatment of municipal bonds would significantly raise costs to public power utilities, said the BLX Group in a report commissioned for APPA last month. (See the March 12 Public Power Daily.)

Access to tax-exempt bonds is a "cornerstone" of public power, APPA President and CEO Mark Crisson told reporters at APPA's Legislative Rally last month. Increasing public power utilities' borrowing costs would raise the rates customers of those utilities pay for electricity, he said. (See the March 13 Public Power Daily.)

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Jeanne Wickline LaBella
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