2016 federal outlook.

• Author: McDonald, Dustin
• Position: Federal Focus

The 2016 congressional agenda will be geared toward the debate among presidential candidates. In the background, Congress will continue to deliberate on proposals that are of concern to state and local government finance officers.

The 2016 congressional agenda will be geared toward shaping and supporting the debate among presidential candidates, leading up to the November election. With Republican and Democratic congressional leaders focused on producing positive election outcomes, the congressional agenda will focus on volatile and divisive policy issues that each party hopes will resonate with voters and drive party faithful to the polls. In the background, Congress and federal departments and agencies will continue to deliberate on legislative and regulatory proposals that are of concern to state and local government finance officers. GFOA priority items in these discussion will include continued efforts to overhaul the federal tax code through comprehensive reform, attempts to revise the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), support of legislation that classifies investment-grade municipal bonds as high quality liquid assets (HQLA), education efforts surrounding public pension systems, ongoing efforts to repeal or significantly reform the Affordable Care Act (ACA), and consideration of legislation dealing with taxation of internet access and state and local collection of taxes on remote sales.

GFOA will also monitor and comment on the Internal Revenue Service's 2015 proposal on a new definition for the issue price of a munici pal bond. Below is an overview of expected federal activity in 2016, including discussion of GFOA's related advocacy campaigns.

TAX REFORM

While 2015 discussions on comprehensive tax reform between congressional leaders and the White House broke down, House and Senate tax writing committees began to identify portions of the federal tax code that could be the subject of future reform. Last April the Senate Finance Committee, under the new leadership of Chairman Orrin Hatch (R-Utah), divided into working groups to review the tax code and solicit recommendations on restructuring portions of it to lower corporate and individual tax rates, close corporate tax loopholes and simplify the tax code. The committee aggregated the recommendations, which will serve as the basis of their work on developing tax reform legislation this year. Under the leadership of Wisconsin Congressman Paul Ryan, the House Ways & Means Committee also spent a good portion of 2015 exploring tax reform.

Unlike the Senate, the House opted to organize a series of individual bills aimed at addressing reforms to select portions of the code. Several of these bills were approved by the House. With Congressman Ryan having ascended to the position of House Speaker last fall, his tax reform strategy is expected to continue in 2016 under new Ways and Means Chairman Kevin Brady (R-Texas). And while House and Senate committees continue their work in this area, they do so with an eye to 2017 as the nearest target for enacting such an overhaul, recognizing that tax-themed legislation and election years seldom pair successfully.

Tax reform, whether piecemeal or comprehensive, has numerous implications for state and local governments. GFOA's Federal Liaison Center will continue to work cooperatively with others in the state and local advocacy community to protect the best interests of our members in the areas discussed below.

Changes to Municipal Securities. Congress and the presidential administration continue to present tax proposals that would limit or eliminate the federal tax exemption on municipal bond interest. Both of these suggested reforms would have a negative impact on state and local governments by increasing their bond issuance costs. For example, a 2013 report issued by a coalition of state and local government associations indicates that the White House proposal to impose a 28 percent cap on itemized investor deductions (to include tax-exempt interest) would increase issuer interest costs by at least 70 basis points. The report also estimates that eliminating the tax exemption would increase issuer interest costs by at least 200 basis points. GFOA will oppose any plans to cap the amount of municipal bond interest that taxpayers can exclude from their federal taxes, as well as oppose any proposals to eliminate the federal tax exemption altogether. (1) GFOA will work with its state and local government association partners to educate Congress and the Administration on the utility of tax-exempt bonds and the value of this critical financing tool in meeting our country's infrastructure needs.

Deductibility of State and Local Taxes. GFOA will work to defeat any proposals to limit or eliminate the federal deduction of state and local taxes. GFOA continues to support legislation that would permanently allow taxpayers to deduct state and local sales taxes on their federal tax return.

MUNICIPAL BONDS

In addition to the implications possible tax reform efforts could have on municipal securities, there are many other important bond-related matters that GFOA will...