Federal Tax Reform Proposal Has Consequences for Local Communities

Posted on March 4, 2014 by Dene Westbrook

Ways and Means Chairman David Camp (R-MI) has released his long awaited tax reform proposal. And, unfortunately within the 1,000 page bill, there is an impact of the tax exempt nature of municipal bonds. It’s not a complete elimination, however it is significant in that, a greater proportion of investors are in the tax bracket facing the new tax. Specifically, the proposal would:

  • Partially tax otherwise tax-exempt municipal bond interest for taxpayers in the new 35-percent tax bracket, which would apply to individuals with income of at least $400,000 and married couples with incomes of at least $450,000. For these taxpayers, the proposal would effectively impose a 10-percent tax on otherwise tax-exempt interest income. The tax would apply to interest earned on both new issues and outstanding bonds.
  • Prohibit the future issuance of tax-exempt private-activity bonds, including bonds issued by private, non-profit entities. In addition, the proposal would prohibit the use of mortgage credit certificates in lieu of tax-exempt mortgage revenue bonds.
  • Eliminate the ability to issue advance refunding bonds.
  • Market discount on municipal and other bonds would be required to be accreted and recognized as income annually over the life of an investment rather than at one time when a bond is sold or redeemed.
  • Eliminate the income tax deduction for state and local taxes paid by residents.

The League’s position is that since the inception of our nation, there has been a legal arrangement that one government entity would not tax another governmental entity’s funding of essential services. We believe that covenant needs to remain intact and urge Congress to remove these components from the package when it begins work on it. We will be taking this message to Congress when leaders of the League visit Washington DC.

Summer Minnick is the Director of Policy Initiatives and Federal Affairs. She can be reached at 517-908-0301 or [email protected].

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