Draft tax reform bill would impose surtax on municipal bond interest
Originally published February 27, 2014
House Ways and Means Committee Chairman David Camp, R-Mich., yesterday released a discussion draft of a sweeping tax reform bill that would impose a 10-percent surtax on interest on municipal bonds, block the issuance of advanced refunding bonds, block the issuance of New Clean Renewable Energy Bonds and other tax credit bonds, and fully tax private activity bonds. "At no time in the history of the income tax has municipal bond interest been subject to an outright federal income tax—precisely because such a tax would interfere with the legitimate governing decisions of bond issuers," APPA said.
Camp "has good intentions, but this approach is the wrong one," APPA said.
"Such a tax would upend the system of reciprocal immunity—leaving federal bonds, bills, and notes exempt from state and local tax, but shifting the cost of federal tax rate cuts onto the backs of state and local governments," APPA said. "Ostensibly a tax on upper-income investors, such a tax would result in investors demanding a higher rate of return on any municipal bonds purchased to compensate for the new tax. This would increase costs for state and local borrowing, a cost which would be passed on to taxpayers and public power utility customers of all income classes."
A new federal tax on municipal bond interest would make investments in highways, bridges, schools, hospitals, housing, airports, electric power generation, water treatment, and the like more expensive and more difficult, APPA said, noting that municipal bonds finance three-quarters of the nation’s core infrastructure.
The 10-percent surtax on municipal bond interest and certain other types of earned income would apply only to individuals earning $400,000 and families earning $450,000, or about one percent of filers. Camp’s 979-page draft would repeal or phase out a range of energy-related tax credits, including the production tax credit for renewable energy and a variety of energy efficiency credits.
While Camp’s draft puts limits on tax-exempt bonds into play, his bill is given little chance of enactment this year. House Speaker John Boehner, R-Ohio, declined to endorse the measure, telling reporters that it is the beginning of a conversation. Senate Republican Leader Mitch McConnell, R-Ky., said flatly that tax reform will not advance in Congress this year.
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