Utah League of Cities and Towns

Making Life BETTER

Congressman Jason Chaffetz (R) – Budget Deliberations

Predicting the outcome of tax reform in general and predicting the future of the municipal bond exclusion specifically is a risky proposition. Tax policy experts generally agree that a tax system with a low rate and a broad base promotes growth, efficiency, and fairness. To broaden the base, Congress and the President must agree on what exemptions, exclusions, deductions, and credit should be kept and which should be eliminated. That hasn’t happened yet, and probably won’t happen for a while.

Including the tax increases in the Affordable Care Act, the federal government has already increased taxes by $1.6 trillion for the next ten years, and any proposal that broadens the base must be accompanied by a reduction in tax rates that maintains revenue neutrality. As a result of these massive tax increases over the past couple of years, the Tax Policy Center projects federal revenues will reach 19.4% of GDP by 2022 . Since 19.4% is substantially higher than the historical rate of 18% of GDP, tax reform should not be an excuse to raise tax burdens even more.

According to a recently updated list of tax preferences issued by the Joint Committee on Taxation (see page 40 of the file found at https://www.jct.gov/publications.html?func=startdown&id=4503) exclusion of interest on municipal debt reduces federal government revenue by $27 billion per year. This is not a small amount, but it’s a lot smaller than many of the other tax preferences such as the exclusion for employer contributions for health insurance premiums (more than $200 billion per year if the effect on payroll tax revenues are included). In total, tax preferences nominally reduce government revenues by more than $1 trillion. Of course, government offsets these tax preferences with tax rates that are artificially higher than they otherwise would be if tax preferences didn’t exist in the first place.

At this point, no one can say for certainty whether Congress will keep the exclusion of municipal bond interest, but somehow broadening the base and lowering rates is a must if we want to grow the economy, reduce distortions to economic decision making, and increase our international competitiveness.