By Larry Jones
April 30, 2012

The Conference of Mayors teamed up with the National League of Cities, National Association of Counties, International City Management Association and the Government Finance Officers Association in submitting written testimony to the Senate Finance Committee during an April 25 hearing on "Tax Reform: What It Means for state and Local Tax and Fiscal Policy." Comments were focused on three specific areas: (1) maintaining the federal tax exemption on municipal bonds to promote job creation and improving the nation’s infrastructure; (2) ensuring that state and local governments retain the authority to set their own tax policy; and (3) opposing federal preemptions that would grant preferential tax treatment to certain industries and threaten the fiscal health of state and local governments.

The testimony stresses the importance of state and local governments having ongoing access to the tax-exempt bond market in order to provide essential infrastructure. Without it, the cost of providing schools, libraries, hospitals, roads and bridges would be significantly higher. Over $2.9 trillion have been issued in municipal bonds by 50,000 separate governmental units. State and local governments are responsible for building and maintaining 75 percent of the nation’s infrastructure, which is mostly financed through tax-exempt municipal bonds. This type of financing allows state and local governments to borrow at a significantly lower rate, saving taxpayers billions of dollars.

Several tax reform proposal have been circulated that would cap certain tax deductions and exclusions on tax-exempt municipal bonds for high income taxpayers; place a sliding cap (that would change from year to year) on the benefits of deductions and exclusions on such bonds; and replace tax-exempt bonds with tax credit bonds. All would amount to a strong disincentive to buy tax-exempt municipal bonds since investors would be subjected to higher taxes and increased uncertainty. Local groups explained that while local groups are supportive of tax credit bonds or direct subsidy bonds, they work best as a complement to and not a replacement of tax-exempt bonds.

Local groups also expressed strong opposition to the elimination or reduction of state and local income, property and sales tax deductions on federal tax returns. The groups argued that this deduction recognizes the historic partnership that exists between federal, state and local governments. And that State and local tax deductibility has contributed to the stability of tax revenues that are reliable and flexible. Any changes that disrupt the stability of their tax structure will only hinder their ability to provide essential services that their residents demand.

Testimony also points out that local governments are still struggling to recover from the Great Recession, facing the fifth straight year of declines in revenue with further declines projected for 2012. In considering any changes to the federal tax code, local government groups call on Congress to recognize the importance of local taxing autonomy in ensuring that the needs of residents are met. Congress was urged to act to promote the intergovernmental partnership by immediately passing the Marketplace Fairness Act (S. 1832), legislation that would give state and local governments the authority to require Internet merchants and mail-order sales companies to collect their taxes. The passage of this legislation would enable state and local governments to collect an estimated $23 billion a year that currently is owed in sales taxes. This would mean more money for investment in local infrastructure and basic services, just what the economy needs to help generate more jobs.

Local government groups restated their long standing opposition to any preemption by Congress of local taxing authority. The testimony cites several examples of pending legislation that would preempt state and local taxing authority: the so called Wireless Tax Fairness Act, which would ban new state and local taxes on wireless communications for five years; the End Discriminatory State Taxes for Automobile Renters Act of 2011, which would ban so called discriminatory taxes on automobile rentals and property related to renting automobiles; legislation that would provide a tax loophole that would allow Online Travel Companies such as Expedia and Travelocity to pay hotel taxes to state and local governments based on the lower wholesale rate they pay hotels for room rentals, rather than on the higher retail rate that customers are charged; the Digital Goods and Services Tax Fairness Act of 2011, which would ban so called multiple and discriminatory taxes on digital goods and services although there is no concrete evidence of this practice by state and local governments; and the Business Activity Tax Simplification Act of 2011, which would redefine what constitutes physical presence to limit the a state’s ability to impose various taxes on businesses conducting activity within the state.

Congress was urged to oppose all such preemptions that grant certain industries preferential tax treatment at the expense of other taxpayers. By approving any one industry’s request, Congress would open the floodgate to all other similar requests. This would further erode state and local revenues and undermine their tax policy.