Idea of the Week: Super Committee’s Legacy is Bipartisan Support for Eliminating Tax Expenditures
Dec 2, 2011
Idea of the Week: Super Committee’s Legacy is Bipartisan Support for Eliminating Tax Expenditures
Even though the Super Committee failed to achieve its objective, or even come close, many in the tax-exempt bond community breathed a sigh of relief that no agreement on tax reform was reached that would have affected the status of the exemption for interest on municipal bonds.
True. The tax-exempt community dodged a November bullet. But the threat remains. Both Super Committee Democrats and Republicans offered proposals that would have limited most so-called tax expenditures. While neither group released a listing of the tax expenditures that would be curtailed, there was no reason to assume that the muni interest exemption would have been spared, and many reasons to assume that it would not have been. These are troubling precedents, as it appears highly probably that congressional tax reform efforts will continue in 2012.
On the Republican side, the so-called “Toomey plan,” named after Super Committee Member Senator Pat Toomey (R-PA), included two main components: 1) a 20 percent reduction in marginal tax rates below the levels under the Bush tax cuts; and 2) a reduction in tax expenditures, which is reportedly based on a plan advanced by Harvard economist Martin Feldstein, and others. The so-called Feldstein plan would cap the tax reduction that each taxpayer could get from tax expenditures to 2 percent of his adjusted gross income. This clearly would impact for the market for municipal bonds.
While the final Democratic Super Committee proposal only included $400 billion in unspecified cuts to tax expenditures, it was presented with the understanding that additional tax expenditure cuts would be forthcoming when Congress turns to tax overhaul. Moreover, President Obama’s American Jobs Act, presented in September, would limit to 28 percent the impact of all itemized deductions and the following adjustments to income and exclusions from income:
- Exclusion for municipal bond interest,
- The self-employed health insurance deduction,
- Section 199 domestic production activities deduction,
- Deduction for qualified performing artists,
- Moving expenses,
- Archer MSA deduction,
- Student loan interest deduction,
- Tuition deduction,
- HSA deduction,
- Cost of employer-provided health insurance, except for flexible spending accounts, and
- The foreign earned income exclusion.
The status of the exemption for municipal bond interest remains very much in play as tax overhaul moves forward. We expect the two tax-writing committees of Congress, the House Ways & Means Committee and the Senate Finance Committee, to continue congressional efforts to overhaul the Internal Revenue Code beginning early in 2012.