Congressional Update

By Elizabeth K. Nevitt and Lori Pickford

The House and Senate reconvened after the November elections to begin deliberations on the so-called "fiscal cliff" issues (reduced federal spending from sequestration and higher taxes resulting from expiration of the Bush tax cuts) and other year-end legislation.

While President Obama, Speaker John Boehner (R-Ohio), and Senate Majority Leader Harry Reid (D-Nev.) have made positive statements about moving together in a bipartisan fashion, it remains to be seen if the respective parties can reach an agreement to prevent higher taxes and spending cuts from taking effect at the end of the calendar year. Many speculate that Congress will advance a framework, which would be viewed as a "down-payment" on larger issues to be addressed by reforming the tax code and modifying entitlement programs to address the deficit. Such a framework would provide additional time to allow the new Congress to work toward a "grand compromise" in the 113th Congress.

Therefore, lame duck deliberations over the fiscal cliff will be the first in a series of debates that could impact tax-exempt municipal bonds, the primary financing tool for NEPPA member utilities. The Administration and Congress must look for ways to increase federal revenues and/or reduce federal expenditures. Over the last two years, several proposals have been advanced to limit or eliminate, going forward, the federal tax exemption for municipal bonds.

CBO Continues to Press for Taxing Interest on Muni Bonds

The Congressional Budget Office (CBO) released a report on Nov. 8 discussing spending and revenue options for deficit reduction. The CBO would tax the interest on municipal and private activity bonds, and would partially offset the increased cost in borrowing by making payments from the Treasury to issuers equal to 15% of the interest expense on those bonds. The provision is estimated to raise $30 billion annually for the federal government by 2020.

According to APPA, the proposal would likely "reimburse state and local issuers for as little as 60% of the increased borrowing costs they would face if these bonds were subject to federal tax." Further, the association cautions that such a reimbursement could be cut at any time, just as may happen to Build America Bond payments if and when the pending sequestration cuts are applied.

During a Nov. 8 APPA government relations call, Vice President Joy Ditto said "our number one, two and three priorities in the new Congress is maintaining tax exempt financing for municipal utilities."

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