Trump Administration officials this week said that the tax exemption for municipal bonds would be preserved under the broad outline of a tax reform plan drafted by key congressional Republicans and administration officials.
On Sept. 27, congressional Republicans and the White House unveiled a nine-page tax reform “framework.” The plan includes several key additional details about their plans for tax reform, but is still extremely high-level with the intention that the House Ways and Means and Senate Finance Committees will fill in those details in October.
The written document released on Sept. 27 does not specifically mention tax-exempt municipal bonds or the state and local tax deduction.
But in a briefing with reporters Sept. 26, an administration official said that the tax-exemption for municipal bonds is assumed to be retained under the proposal, while the deduction for state and local taxes is assumed to be repealed.
Overall, the framework would cut the top corporate tax rate from 35 percent to 20 percent and cut the top tax rate on limited liability corporations, S corporations, partnerships, and other “pass through” entities from 39.6 percent to 25 percent.
Reductions in individual income tax rates would be more modest with the top marginal income tax rate to decline from 39.6 percent to 35 percent.
But the framework says that an additional top rate might be imposed above 35 percent, if needed to maintain the tax code’s progressivity. Likewise, the bottom individual income tax bracket would actually rise from 10 percent to 12 percent.
The framework emphasized that “typical” families in the current 10 percent bracket would still be better off under the 12 percent rate because of other changes proposed.
Some analysts have worried that the low marginal tax rate on corporations and “pass through” entities would diminish demand for tax exempt municipal bonds. Most bonds are held by individuals either directly or through funds, and the retention of high marginal personal income tax rates would mitigate any shift in demand for tax-exempt municipal bonds.
A number of details have yet to be finalized and legislative language is not expected to emerge for weeks.
The proposal is intended to reflect agreements reached over the last several months by House Speaker Paul Ryan, R-Wis., House Ways and Means Committee Chairman Kevin Brady, R-Texas, Senate Majority Leader Mitch McConnell, R-Ky., Senate Finance Committee Chairman Orrin Hatch, R-Utah, Treasury Secretary Stephen Mnuchin and National Economic Council Director Gary Cohn.
Business deduction for interest paid
The American Public Power Association has been tracking the issue of the business deduction for interest paid.
While public power utilities do not claim such a deduction, a House Republic blueprint had proposed to eliminate this deduction entirely, but allow a 50 percent exclusion for interest earned. A company issuing debt could not deduct the cost of interest, but only half of the interest paid would have been counted as income for the lender. This would have substantially narrowed the tax advantage of holding tax-exempt municipal bonds.
The framework partly retains the interest expense deduction for businesses, but it is unclear at this point whether it would retain the 50 percent exclusion for interest earned.
Maintaining tax-exempt status for municipal bonds key area of focus
Maintaining tax-exempt financing for public power utilities has been a key area of focus for the Association in 2017.
Tax-exempt municipal bonds are critical to power system infrastructure investments and the Association will continue to oppose any efforts to tax interest paid on these bonds.
Reps. Randy Hultgren, R-Ill., and Dutch Ruppersberger, D-Md., earlier this year were joined by more than 150 of their colleagues in sending a bipartisan letter to leaders of the House Ways and Means Committee in support of tax-exempt municipal bonds.
The letter was sent to House Ways and Means Committee Chairman Brady and Ranking Member Richard Neal, D-Mass., with a total of 156 signatures.
The total number of signatures was an improvement over similar letters in 2013 and 2015, which garnered a total of 139 and 124 total signatures, respectively.
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