Municipal bond tax comes up again in Obama budget proposal


President Obama released his budget proposal today, and while some details are still forthcoming one item is critical to state and local governments. The budget proposal includes, again, a measure that would cap the tax exemption for interest paid on municipal bonds.

As CivSource has reported, capping the exemption faces steep opposition from state and local officials who worry about the chilling effects an additional tax burden will have on municipal bond issuance and current payouts. Municipal bonds finance much of the infrastructure and development projects advanced by city governments and their tax exempt status makes them appealing to individual investors. Individual investors are the largest holders of municipal bonds. Cities too would have to find additional money in the budget once the cost of those interest payments go up.

At the federal level, there has been some support for keeping the exemption open. That support appears to be growing. Fourteen Senators have joined with House Majority Leader Eric Cantor (VA) in opposing proposals to alter the exemption for municipal bonds. In a letter to President Obama, Senator Begich and thirteen other Senators voiced their opposition to any effort to change the tax-exempt status of municipal bonds calling any proposal to do so “inappropriate” and “shortsighted.”

“While we recognize the challenges our nation faces as we work to bring order to our fiscal house, we believe strongly that balancing the federal deficit by shifting the burden to local governments would have, ironically, a substantial negative impact on our federal budget outlook through decreased federal tax receipts as a result of diminished economic activity,” the letter states.

In today’s summary released by the White House, the exemption would cap the value of the benefit for the top 2% of earners at 28%. This is similar to earlier proposals that the president has advanced before, although they too failed to make it through congressional and municipal opposition. The Senators who signed on to the letter are a bipartisan group:

Mark Begich, AK
Maria Cantwell, WA
Kirsten Gillibrand, NY
William Cowan, MA
Bernard Sanders, VT
Tom Udall, NM
Tom Harkin, IA
Elizabeth Warren, MA
Tim Johnson, SD
Barbara Boxer, CA
Mary Landrieu, LA
Heidi Heitkamp, ND
Al Franken, MN
Tammy Baldwin, WI