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Senate Finance Committee staff white paper suggests options for altering tax-exempt status of municipal bonds

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Current law affording tax-exempt status to the interest on municipal bonds continues to be threatened, judging by a white paper issued May 15 by staff of the Senate Finance Committee. The document is the sixth in a series of papers compiling tax reform options that lawmakers on the committee may want to consider as they work on tax reform legislation.

The white paper, which was prepared for a private meeting May 15 among members of the committee, includes the option to "repeal the tax exemption on all governmental and private activity bonds."

The paper also listed these options for overhauling the nation's tax code:
• "Create a new, permanent direct subsidy for bonds for financing government capital projects;" and
• "Replace the exclusion for interest on state and local bonds with a direct subsidy for the issuer or a non-refundable tax credit for the investor."

The staff document says tax-exempt bonds "are intended to reduce the borrowing costs to state and local governments by providing a tax exemption for investors on the interest they receive," but adds that, "according to the Congressional Budget Office, about 20 percent of the subsidy does not accrue to the state and local government by lowering their borrowing costs."

In a section on federalism, the paper notes, "Some believe that it is not an appropriate role for the federal government to assist state and local governments by, for example, helping to pay for local infrastructure or services. Others argue that such assistance has spillover effects beyond the local community, and therefore the federal government should play a role."

A number of changes to the current deductions for mortgage interest were among the other options for tax reform offered in the paper.

"Tax reform provides an opportunity to simplify tax expenditures for economic and community development and, if members of Congress decide to preserve these provisions, make them more effective," the staff paper said. In a foreword introducing the document, Senate Finance Committee staffers said that, "for the sake of brevity, the list does not include options that retain current law."

"The failure to mention key points in opposition to the proposed changes would appear to indicate a real threat that the Finance Committee staff is inclined to support limiting, replacing, or repealing the exclusion" in current law that protects the tax-exempt status of municipal bonds, said John Godfrey, senior government relations representative for APPA. —JEANNINE ANDERSON


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