New Senate Budget Committee Chairman Patty Murray, D-Wash. insists tax expenditures must be cut and other revenues raised for the fiscal 2014 budget in a letter and memo that are raising alarm among municipal market participants.
"This memo identifies the most significant conclusion that can be drawn from the facts as they stand today," Murray said in a two-page letter to colleagues announcing her intent for the committee to write its first budget resolution in four years. "We need to fight to make sure any budget deal we make is balanced, fair for the middle class, and calls on the wealthiest Americans to pay their fair share."
Murray included a 10-page memo that she said, "lays out just a few of the tax giveaways for corporations and the wealthiest Americans that should be on the table."
"The recent [fiscal cliff] agreement did little to address the skewed distribution of the benefits conferred to high income households by tax expenditures," Murray wrote in the memo. "In total, tax expenditures were estimated to cost the Treasury $1.2 trillion in forgone revenue in 2011. That is nearly equivalent to what we spent on all discretionary programs in 2011."
"We could raise hundreds of billions of dollars by making sure the rich no longer benefit disproportionately from deductions and other tax preferences," she said.
A budget resolution is the first step in a long process that could lead to congressional budget reconciliation instructions for committees setting budget amounts, allocations and, in the case of tax-writing committees, amounts of revenue to be raised.
Municipal market participants who breathed a collective sigh of relief after the fiscal cliff agreement did not impose a 28% cap on tax expenditures, which include the income exclusion for muni bond interest, are once again in defensive mode.
"Is this a real threat? Absolutely," said one long-time market participant who did not want to be identified. "Murray's views are clearly consistent with those of White House officials."
"It's an indication that muni bond interest is still on the table," said Bill Daly, director of governmental affairs for the National Association of Bond Lawyers.
"Whenever we see the words 'revenue' and 'middle class,' we know many in Congress think that a 28% cap is an acceptable approach," said Susan Collet, senior vice president of government relations for Bond Dealers of America. "If that is going to be the approach, we don't think tax exemption should be included. It would be a federally imposed tax on local infrastructure and it would have broad effects beyond the wealthy."
Collet said a recent analysis shows that 60% of tax-exempt interest is reported by taxpayers over the age of 65.
"You can't look at it as, 'We're targeting the wealthy.'" she said. "You've got to look at it according to the demographics. A lot of seniors would be effected. They're looking at this as a reliable investment, not an investment that would be taxed."
Tim Firestine, the chief administrative officer for Montgomery County, Md. who is slated to become chairman of the Government Finance Officers Administration later this year, said. "We appreciate the efforts that the federal government must take in order to balance its budget and address the nation's debt. However, this should not be done on the backs of state and local governments. Efforts to eliminate or diminish the muni exemption will not ultimately benefit taxpayers. Rather, it will cost taxpayers more, as the cost of paying for capital projects that our citizens expect and need will increase, and those costs will be borne by all taxpayers."
But long-time observers of Congress said Murray may find it hard to follow through with her plans.
"I think the politics are going to make it difficult," said the anonymous source.
The same day Murray sent her memo out, Senate Finance Committee Chairman Max Baucus, D-Mont. introduced a bill to expand a tax credit for hiring veterans.
"She's a neophyte and she's talking about cutting tax expenditures the same day the Senate Finance Committee chairman is proposing to expand a tax expenditure," the source said, adding that nearly 90% of the budget — Medicare, Medicaid, Social Security, and interest of U.S. debt — is the purview of the tax-writing committees, especially in the Senate.
In addition, Republicans have repeatedly stated they oppose tax increases and want to focus solely on spending cuts. Republicans would not likely consider revenue raisers unless they were part of a comprehensive plan to cut income tax rates, sources said.
But Chuck Samuels, a partner at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., warned, "The potential convergence of Democratic interests, in raising revenues, and Republican interests, in cutting income tax rates, could be the same. We need to understand the code words are different but the results may be the same, Two different rationales but the same result. It doesn't take much imagination to see us right back at the 28% cap."
