Storm clouds gather: two fights--one to preserve the tax-exemption on municipal bonds and another to prevent federal oversight of state and local government financial and bond disclosure information--are on the radar.

• Author: Gaffney, Susan
• Position: Federal Focus

Congress has a long and complicated to-do list that has numerous implications for state and local governments. At the heart of these discussions is federal tax policy and the possibility of fundamental changes to the tax code that have not been seen for more than 30 years, since the enactment of the 1986 Tax Reform Act. But unlike the 1986 Act, which took years to accomplish, Congress may not be as measured in its approach to tax policy this time around, as politics and ideology seem to be driving decisions made in our nation's capital today

Regardless of how these decisions are made, at the end of the day, they will be fraught with potential harm to state and local governments--and the municipal bond market. Furthermore, the regulatory landscape looks challenging in 2013, especially for governments that issue municipal securities. The Securities and Exchange Commission, the Municipal Securities Rulemaking Board, and other regulatory bodies are still busy with their work implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new SEC Chairman, Elise Walter, led a multi-year project that cumulated last year in a report concluding that the SEC should look for ways to regulate state and local governments, including changes to SEC rules and new legislation to increase the SEC's authority. GFOA members and the entire state and local government community need to be aware of the perfect storm that could be developing in 2013, with two fights--one to preserve the tax-exemption on municipal bonds and another to prevent federal oversight of state and local government financial and bond disclosure information --appearing on the radar.

Below is an overview of some of the municipal securities issues that are likely to top the list of concerns for the GFOA and other state and local government associations in 2013. More information about these issues is available on GFOA's website at www.gfoa.org.

TAX REFORM AND MUNICIPAL SECURITIES

As we have seen over the past couple of years with the 2011 Super Committee's efforts to develop a grand bargain addressing federal spending and tax issues (which led to the 2012 "fiscal cliff" discussions), the different approaches to addressing short- and long-term fiscal issues are challenging. Putting aside the likely spending cuts that will be dealt to state and local governments by the federal government, how Congress tackles tax reform could both directly and indirectly put additional economic pressures on state and local governments.

Various government agencies and economists have released estimates regarding the costs of federal tax benefits, which include items related to state and local governments (see Exhibit 1). If Congress moves forward with meaningful tax reform, most, if not all, of these deductions and exclusions will be challenged in the tax reform debate. Of particular note, aside from changes to municipal securities, is the deduction of state and local taxes. The federal government has considered doing away with the deduction of taxes paid for income and property, as well as the deductibility of sales taxes. Losing the deductibility of state and local taxes is problematic for state and local governments in itself. Taken in combination with other tax changes that may be made and noting that federal discretionary spending to state and local governments is at its lowest point in four decades, (1) activities in Washington could further dampen the state and local government sector's economic recovery and create a drag on the national economy--the opposite of benefits...