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WASHINGTON — President Obama on Tuesday unveiled a $4.1 trillion budget for fiscal 2017, his last one, that includes his recently proposed $10 per barrel tax on oil to fund green transportation projects and several recycled proposals that would either benefit or restrict the use of municipal bonds.
But the budget is dead on arrival in Congress and the Republican-led Budget Committees don't plan to even consider the proposals. The Budget Committee leaders have announced they won't hold hearings, a striking break from tradition.
House Speaker Paul Ryan, R-Wis., called the budget request "a progressive manual" for "growing the federal government at the expense of hardworking Americans." House Republicans will produce a "balanced budget," he said.
Several of the president's budget proposals would hurt munis beginning in calendar year 2017, after the new fiscal year starts on Oct. 1. Obama renewed his push to both limit the tax value of tax-exempt bond interest to 28% for single taxpayers with incomes over $200,000 and couples over $250,000 and eliminate tax-exempt financing for professional sports stadiums. He also again proposed imposing a fee on banks and broker-dealers that have $50 billion or more of assets at the start of the year.
On the plus side for the muni market, the budget renewed Obama's proposals for the creation of tax-exempt qualified infrastructure bonds, American Fast Forward direct-pay bonds, and a national infrastructure bank, as well as an increase in the annual issuer limit for bank-qualified bonds.
QPIBs would be exempt from private-activity bond volume caps and the alternative minimum tax and could be issued beginning in 2017 for airports, docks, wharves, mass commuting facilities, water and sewage facilities, solid waste disposal projects and qualified highway or surface freight transfer facilities, as well as broadband to provide high-speed internet access. The projects would have to be owned by a state or local governmental unit and available for regular public use.
AFF bonds would be taxable but Treasury would make subsidy payments to issuers equal to 28% of their interest costs. These bonds could be used to finance any projects that could be financed with private-activity bonds or QPIBs, as well as government capital projects, current refundings of those bonds, short-term working capital financings and projects for 501(c)(3) nonprofit entities.
Obama seeks to end sequestration, automatic across-the-board budget cuts that have reduced subsidy payments to issuers of Build America Bonds and all other direct-pay bonds.
As in the past, Obama is proposing to increase to $30 million from $10 million the reasonably expected annual issuance limit for issuers who want to sell their tax-exempt bonds to banks.
The president would also repeal the $150 million limit on the volume of outstanding non-hospital tax-exempt bonds of a 501(c)(3) nonprofit organization, allow current refundings of direct-pay, tax credit and state and local bonds under certain conditions, streamline private-activity limits for governmental bonds, and simplify arbitrage investment restrictions and single-family housing mortgage bond targeting requirements.
Obama has again proposed a "fair share tax" based on the so-called Buffet Rule for Warren Buffett that ensure the very wealthy pay taxes equal to no less than 30% of their adjusted gross income less a credit for charitable contributions. The tax is designed to ensure the wealthy don't use deductions and other tax preferences to escape paying taxes.
Muni market groups noted Obama's budget proposals would both giveth and taketh away.
"We appreciate the President's proposal to encourage infrastructure investment by introducing America Fast Forward Bonds and to address limitations in the use of tax-exempt bonds. However, the 28-percent cap on tax preferences would impose a partial tax on municipal bond interest that would add further financial burdens to our cash-strapped state and local governments, ultimately discouraging investment in infrastructure projects and stifling job creation." said Ken Bentsen, president and chief executive officer of the Securities Industry and Financial Markets Association.
"We're pleased that the increase in the bank-qualified bond limit is there again and we are advocating for that proposal to be passed by Congress," said John Vahey, director of policy for Bond Dealers of America. "But in an election year, where everyone's talking about the need for infrastructure, growth and jobs, BDA does not believe that making tax-exempt bond projects more expensive is the solution."
State treasurers were unhappy about Obama's proposal to partially tax muni bond interest. The National Association of State Treasurers "strongly opposes the President's proposed changes to the current tax treatment of municipal bonds, which are a vital source of funding used to build and preserve infrastructure in our communities," said NAST president and Washington State Treasurer James McIntire. "As Congress begins to debate the budget, the House, Senate and Administration need to fully understand and acknowledge the importance of tax-exempt municipal bonds and their absolute, unbreakable relationship to the preservation and development of our nation's infrastructure."
"Municipal bonds have long been a vital source of funding for states, cities and counties to pay for essential infrastructure needs. Removing the tax-exempt status of these bonds for select taxpayers would cause a devastating ripple effect—one that would ultimately cause every American to foot the bill," said NAST senior vice president and Oklahoma State Treasurer Ken Miller. "We call on Congress to preserve this necessary funding mechanism so that schools, roads, hospitals, and more receive the fundamental improvements our communities deserve."
Chuck Samuels, a member of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo who works with nonprofit groups, said, "It's gratifying to the nonprofit community that the America Fast Forward Bonds would include nonprofits. If the program was well designed, as suggested by the president, it would be welcomed in the nonprofit community as an alternative, available financing tool.
On the other side of the spectrum of borrowers, the proposal to permanently liberalize the bank deductibility rules also is most welcome by thousands of small borrowers. The proposal doesn't mention the critical feature of the American Recovery and Reinvestment Act, which was to apply the new limitation to the borrower not issuer in conduit financings but we understand this is a part of the proposal here as well."
Transportation
Obama's budget re-proposes an increase to $19 billion from $15 billion the aggregate amount of qualified highway or surface freight transfer facility bond that be allocated by the Transportation Department.
It includes almost $17.935 billion in fiscal 2017 for the 21st Century Clean Transportation Plan outlined last week. It is the first phase of a $320 billion, 10-year effort to develop high-tech vehicles and environmentally friendly road and transit infrastructure networks that can better withstand the stresses of climate change.
The main links the national transportation system are the Interstate highways and rail networks that were built years ago, White House officials said.
"Unfortunately, today the remains of that system—the crumbling highways, bridges, and passenger rail system—are not ready to meet the challenges of a growing 21st century economy," the budget message said. "Due to underinvestment American infrastructure that was once the envy of the world is now ranked 19th behind countries such as Poland, Hungary, and Spain."
The clean and green transportation plan would be funded with a $10.25 per barrel tax on imported and domestically produced oil to be phased in over five years. The White House estimated the oil tax will generate $319 billion over 10 years.
The oil tax, which would be passed on to motorists at the pump, would add about 25 cents to the costs of a gallon of gasoline when fully implemented. The current federal gasoline tax is 18.4 cents per gallon.
The first few years of the 10-year plan would be funded with one-time revenues from revisions to the corporate tax code that the Administration said would bring in $176 billion for transportation.
But Republicans are already lining up against the proposed tax on oil. Rep. Charles W. Boustany Jr., R-La., introduced a bill opposing the tax on Tuesday, as the president's budget proposals were released.
"The President wants to fund his environmental agenda on the backs of hard-working Louisiana families in the oil and gas sector, and that is dead wrong," Boustany said. "I won't stand by and watch the President run over these families with a tax that will be passed on at the pump."
The clean-energy funding is in addition to the $43.1 billion allocated to highway projects and $11.8 billion for public transit in fiscal 2017 by five-year, $302 billion Fixing America's Surface Transportation (FAST) Act that Obama signed into law in early December.
Other proposed new funding in 2017 would include $3.7 billion of competitive grants for high-speed rail and other advanced rail technologies, $5.9 billion for safer, more efficient transit systems, $2 billion for multimodal freight projects, $2 billion to states for mitigation of air pollution and other transportation impacts, and $200 million for research and development of autonomous vehicles.
The budget proposal would boost the funding for Transportation Investment Generating Economic Recovery grants to $1.25 billion in fiscal 2017 from $500 million in the fiscal 2016 omnibus budget approved by Congress in December. It would convert TIGER, which now must be renewed in each annual budget, into a mandatory, long-term program.
The 2017 budget proposal is an admission by the President that the FAST Act did not include a sustainable revenue source that can meet the nation's infrastructure needs, said Peter Ruane, chief executive officer at the American Road & Transportation Builders Association.
"The President's proposal to levy a $10 fee on a barrel of oil to stabilize and grow Highway Trust Fund investments through user funding is exactly the type of solution that is necessary going forward," he said. "Unfortunately, the game was played last year and the President was AWOL."
The response by House Speaker Paul Ryan, R-Wisc., that Obama's proposed oil tax was "dead on arrival" in Congress also ignores the lack of a long-term funding source, Ruane said.
"Speaker Ryan's knee-jerk, dismissive reaction to the President's proposal is similarly not helpful," Ruane said. "Where is his long-term funding solution for the nation's highway and transit programs?"
State Revolving Funds
The budget would increase Drinking Water State Revolving Funds about 18% to $1.02 billion from the $863.23 million 2016 enacted level and decrease Clean Water State Revolving Funds about 30% from the 2016 enacted number.
The Clean Water fund number, which dropped to about $979.5 million from $1.39 billion, is a fairly significant decrease, according to Rick Farrell, executive director of the Council of Infrastructure Financing Authorities.
But he said he does not think the drop is significant because Congress has been more generous with allocations to the funds since last year.
"If we get the money Congress gave us last year, that doesn't represent any significant boost from what we used to get in previous years," he said. "So this is more of a steady state type of thing."
The money allocated to the revolving funds is divided up among states and then loaned to cities and communities to build water infrastructure systems.
Puerto Rico
The budget proposals on Puerto Rico for fiscal 2017 mirror the ones the administration announced in late October and urge Congress to pass restructuring legislation for the territory that would be paired with fiscal oversight, strengthened Medicaid coverage, and an Earned Income Tax Credit. The budget leaves the specifics of a restructuring regime and necessary oversight up to legislators. But it makes clear that the restructuring and oversight solutions must "provide Puerto Rico with the necessary tools to restructure its financial liabilities in a fair and orderly manner under supervision of a federal court" and "strengthen Puerto Rico's ability to implement a sound plan for achieving financial stability while also respecting Puerto Rico's unique status and local autonomy."
The requirements for restructuring resemble the a Chapter 9 bankruptcy process, which was initially called for by the Treasury Department. But Antonio Weiss, a counselor to Treasury Secretary Jack Lew, recently said restructuring could come through Congress's ability to create rules and regulations regarding U.S. territories instead of changes to the bankruptcy code.
Weiss's statements during a Feb. 5 panel on the commonwealth sponsored by the Bipartisan Policy Center were a departure from the "Super Chapter 9" proposal Treasury had previously pursued that would give the entire commonwealth access to bankruptcy protections.
The Super Chapter 9 idea has not gained traction on either side of the aisle in Congress and Republicans have generally opposed a bankruptcy regime for Puerto Rico's public authorities.
The president's proposed budget would also remove a current cap on Medicaid funding in Puerto Rico and other territories and would gradually increase the federal support territories receive through the federal Medicaid match by transitioning them to the same federal support that is given to the mainland. It would additionally expand eligibility to 100% of the federal poverty level in territories that are currently below that percentage level while making eligibility for maximum federal support contingent on territories meeting financial management and program integrity requirements and milestones.
The EITC extension to Puerto Rico would be "to reward work and break [the] vicious cycle" of recession the commonwealth has seen for the last decade. The EITC, which citizens living in all 50 states and the Washington D.C. can already use, allows people with low to moderate income to receive favorable tax treatment like payment reductions and possible refunds.
Another proposal in the budget would impose a 19% minimum tax on controlled foreign corporations operating outside the country with no loopholes or opportunities for deferral. The president's fiscal year 2016 budget had the same proposal and raised concerns from people in Puerto Rico that it may curb investment in the commonwealth as it is already struggling financially. Under current tax law, a subsidiary of a U.S.-based corporation does not have to pay taxes to the Treasury unless the subsidiary's profits are repatriated to a location in one of the 50 states. This is true for subsidiaries in Puerto Rico and has allowed American companies to avoid taxes by operating in the commonwealth.