Lawmakers and lobbyists are currently in a state of uncertainty due to the recent election, the national debt, and the key legislative achievements of the Trump administration. One particular issue that has them on edge is the possible elimination of the tax exemption for municipal bonds. This move could have significant implications for state and local governments, as well as for muni investors.
According to the National Association of Counties (NaCo), state and local governments have been increasingly responsible for funding infrastructure and public improvements over the past half century. In fact, about 75% of public funding for transportation and water infrastructure comes from state and local governments. If the tax exemption for municipal bonds is eliminated, these investments will become more expensive, putting a strain on state and local governments and their taxpayers.
Additionally, muni investors would be negatively impacted by losing the tax exemption, as it would make their investments less valuable. This could discourage investors from putting their money into municipal bonds, further exacerbating the financial challenges faced by state and local governments.
In an effort to address revenue spending cuts and find ways to balance the budget, lawmakers are considering various options. The House Ways and Means Committee has traditionally been resistant to making changes to the Tax Cuts and Jobs Act (TCJA). To explore potential solutions, Chairman Jayson Smith has established ten Republican-only working groups within the Committee. These groups are focused on specific economic areas such as the supply chain, global competitiveness, community development, and rural America.
On the Senate side, the Democratically controlled Finance Committee is exploring remedies for debt relief, including a proposed billionaire’s tax. This tax would require individuals earning $100 million or more in income for three consecutive years to pay taxes on unrealized gains. The policy is estimated to raise $557 billion over a 10-year period, according to a 2021 analysis by the Joint Committee on Taxation. President Biden has also proposed his own version of a billionaire’s tax, which would impose a 25% minimum tax on unrealized gains.
Apart from considering new taxes, lawmakers are also looking at closing tax loopholes to generate additional revenue. Earlier this week, the Internal Revenue Service announced its intention to deny billions of dollars in claims for the Employee Retention Credit program, citing fraud and budget overruns. Some members of Congress have opposed this move, as some claims are still being processed.
On the judicial front, the Supreme Court recently ruled on a Tax Cuts and Jobs Act question, upholding a one-time tax on offshore earnings that helped finance the legislation. This decision highlighted the basic power of taxation held by Congress. Eliminating such tax provisions could result in the loss of trillions of dollars in tax revenue for the U.S. government and its citizens.
The debate surrounding tax cuts, job act provisions, and revenue spending cuts is complex and multifaceted. Lawmakers and lobbyists are faced with difficult decisions as they try to navigate these challenges and find solutions that will benefit the economy and taxpayers alike. The fate of the tax exemption for municipal bonds and other tax-related issues will continue to be hotly debated in the months to come.