WASHINGTON, April 10 U.S. President Barack Obama
in his budget on Wednesday proposed capping the value of the tax
exemption for interest paid by municipal bonds, suggesting once
again a way to raise revenues that has rattled the $3.7 trillion
municipal bond market for more than a year.
According to a summary released by the White House, in his
budget proposal for fiscal 2014 Obama would limit the value of
tax benefits for the top 2 percent of earners to 28 percent from
the current 35 percent.
If approved, the cap would essentially drive down the appeal
of municipal bonds often sold to wealthy investors who can
exempt the interest from their federal income taxes. It risks
pushing up the borrowing costs for state and local governments
that use the bonds to finance bridges, roads and other capital
Obama was expected to release his full budget later
The budget is a proposal and, as has happened in past years,
will likely not become law. Moreover, members of both parties in
the U.S. Congress have expressed opposition to limiting the
municipal bond exemption, including heavy hitters such as
Republican House Majority Leader Eric Cantor and Democratic
Massachusetts Senator Elizabeth Warren.
This is the third time Obama has suggested capping the value
of the tax exemption for high-income earners - he did so in the
2013 budget and also in his American Jobs Act in 2011. The
independent, bipartisan tax reform group known as Bowles-Simpson
also suggested limiting the tax break.
Specifically, he has suggested making the bonds subject to a
28-percent cap for individuals earning more than $200,000 or
couples more than $250,000.
In fiscal year 2011, the U.S. government missed out on
collecting $30 billion in revenues because of the exemption,
according to the Congressional Budget Office. The exemption
dates back to the federal tax code's creation in 1913.
In February, U.S. Treasury Secretary Jack Lew said during
his nomination hearings that the suggestion had been intended as
"a fall-back, saying that if tax reform doesn't happen, this is
something that would help us to get to the revenue targets we
Still, governors, mayors, state lawmakers, and investors
are on guard against the cap now more than ever.
As the federal government scrambled to avoid the "fiscal
cliff" of sequestration and tax increases at the end of 2012,
some lawmakers brought up the limit as a way of raising
revenues. Some feared it would be eliminated altogether.
Recently, a coalition of city and county leaders estimated
they would have had to pay $18.8 billion more in interest over
the last decade under Obama's cap and $53.8 billion if the
exemption were removed.
For example, Virginia's Fairfax County paid $98.1 million in
interest on its debt last year. It would have paid $14.6 million
more under the cap and $41.8 million if the exemption were
eliminated, according to the coalition, which included the U.S.
Conference of Mayors and the National Association of Counties.