| WASHINGTON, June 25
WASHINGTON, June 25 President Barack Obama's
administration is still pursuing his proposal to limit the tax
exemption for interest paid by municipal bonds, with a top U.S.
Treasury official on Tuesday saying the agency hopes new debt
programs will allow state and local governments to continue
financing public works.
As part of his push to balance the federal budget, Obama has
repeatedly suggested limiting the rate at which high-income
taxpayers can reduce their liability at 28 percent.
If approved, the cap would essentially drive down the appeal
of municipal bonds, which are often sold to wealthy investors
willing to accept lower interest rates because of the exemption.
The suggestion has rattled both buyers and sellers in the $3.7
trillion bond market.
Mary John Miller, under secretary for domestic finance at
the U.S. Treasury, told a conference convened by a group of
economists and political leaders that other "sacred cows" would
also be capped under the proposal, including the mortgage
With the economy recovering, the U.S. government must look
into cutting spending and raising revenue, she told the meeting
of the State Budget Crisis Task Force, headed by former Federal
Reserve Chairman Paul Volcker and former New York Lieutenant
Governor Richard Ravitch.
"The idea is if we are going to pursue any sort of
comprehensive reform of our fiscal balance we're going to have
to make a lot of choices and we're going to have to consider
everything," Miller said.
She called tax-exempt muni bonds "perhaps not the most
efficient way to help the issuers of the debt," citing
disproportionate benefits to investors while issuers fail to
reap their full benefit of the tax subsidy.
Miller said the issue bears discussing while considering
Obama's proposal for new taxable bonds, "and to try to introduce
another mechanism for helping issuers who are trying to fund
In his budget in April, Obama proposed selling taxable
America Fast Forward bonds that would offer federal rebates
equal to 50 percent of their interest costs when sold for
capital works at public schools and universities and equal to 28
percent of interest costs when issued for other projects.
The program is based on the wildly popular Build America
Bonds, which paid rebates equal to 35 percent of interest costs
and were part of the 2009 economic stimulus plan. They expired
when the plan ended. Under the federal budget cuts that began in
March, their rebates have been lowered and the unexpected
reductions have made states, cities and counties cool to Fast
Forward and other ideas for rebate bonds.
Mayors, governors, state lawmakers and county commissioners
have stood shoulder-to-shoulder with bond investors and dealers
to support the bond exemption since the cap was first broached
three years ago. They warn that a limit would raise borrowing
costs for governments, forcing them to shrink the number of
infrastructure projects and slow down the economy. Meanwhile,
they say a cap would threaten the tax-free income of many
The fate of the cap proposal is uncertain. It would have to
be part of a larger overhaul the tax system currently working
through the politically fractured Congress. Lawmakers from both
parties have voiced support for maintaining the bond interest