Daily Tax Update - March 19, 2013: Ways and Means Hearing on Tax Reform and State and Local Governments

WAYS AND MEANS HEARING ON TAX REFORM AND STATE AND LOCAL GOVERNMENTS:  Today, the House Ways and Means Committee held a hearing on Federal tax provisions that affect State and local governments. In his opening remarks, Chairman Camp said, “Several items in the tax code directly affect State and local governments.  The most significant and widely known provisions include:

  • The exclusion of State and local governmental income from Federal income tax,
  • The itemized deduction for State and local income, property, and sales taxes,
  • Various benefits for State and local bonds, and
  • Special rules for State and local government employee pensions and benefits.” 
  • Camp continued, “Other provisions indirectly affect State and local governments as well, such as the exclusion for contributions to corporate capital.. . . Other tax reform proposals have also proposed significant reform of Federal tax provisions that affect State and local governments.  Generally, these proposals reduce the tax expenditures associated with these provisions and use the money to finance either rate reduction or higher spending.”  Camp added, “[W]e are not writing a tax reform bill in some ivory tower.  Changes to the tax code will have a real impact on State and local economies, and the Committee needs to hear directly from these stakeholders before considering any proposals as part of comprehensive tax reform.”  

The witnesses were:

Mr. Scott Hodge
President, Tax Foundation

Mr. David Parkhurst
Director of Economic Development and Commerce Committee, Office of Federal Relations, National Governors Association

Dr. Christopher Taylor
Former Executive Director, Municipal Securities Rulemaking Board

Mr. John Buckley
Professor of Law, Georgetown University Law Center, Graduate Tax Program

  • Mr. Hodge said, “I applaud the Committee for reconsidering the tax preferences that benefit state and local governments within the broader context of fundamental tax reform. I think we all know that the defenders of these provisions will put enormous pressure on Members of Congress to not eliminate them, as was done successfully in 1986. However, the evidence is very clear that these provisions produce more harmful effects than benefits. They encourage higher taxes, higher spending, and more debt by state and local governments. And our simulations show that eliminating these provisions while lowering tax rates would lead to higher GDP, higher private investment, higher wages, and better living standards for all Americans.
  •  Mr. Parkhurst discussed the National Governor’s Association’s Tax Reform Task Force. His main points were:
    • “Public finance – notably tax-exempt bonds – is the primary method to finance infrastructure projects – including schools, hospitals, roads, and bridges – approved directly by voters or by governing bodies.
    • Federal laws and regulations, either directly or indirectly, should not increase the costs states and local governments incur to issue municipal bonds or decrease investor appetite to purchase them.
    • No federal law or regulation, including their interpretation and implementation, should preempt, limit or interfere with the constitutional or statutory rights of states to develop and operate their revenue and tax systems.”
  • Dr. Taylor stated, “As the Committee considers what, if any, actions it wishes to take with regard to the tax exemption of municipal securities, it may wish to consider what conditions it wishes to impose on those who are granted the privilege to raise funds at a preferential rate. It is critical for the economic well-being of this country that there is a broad, competitive market with integrity in which municipal entities can raise funds for infrastructure purposes.”
  •  Mr. Buckley testified, “There is little doubt that our tax laws are in need of reform and the Committee did not have to conduct hearings to reach that conclusion. However, this and other hearings on various aspects of tax reform can provide information necessary for this Committee to make the fundamental decisions concerning the structure of the reform.” Buckley continued, “ In my opinion, there are two possible approaches:
    • The Committee could attempt to formulate a tax reform plan consistent with the plan contained in the budget proposed last week by Budget Committee Chairman Paul Ryan. Such a plan would have dramatic reductions in tax rates, coupled with equally dramatic repeals or limitations of current tax benefits. Unlike others in the tax reform debate, the Committee cannot avoid the painful details. There would be hard votes, perhaps on party lines, for legislation with highly uncertain prospects of enactment.  
    • Another approach would be a reform that identifies problematic areas and proposes structural reforms in those areas. The Chairman has already identified three such areas and released options for reform. I may disagree with some of the details, but agree with the choice of the areas where reform is needed and think that the proposed options were thoughtfully developed.” Buckley added, “Quite simply, dramatic reductions in marginal tax rates should not be financed by changes that could reduce needed public infrastructure investments unless the Congress is prepared to finance those investments with appropriated funds.”