WASHINGTON — President Obama’s fiscal 2013 budget will propose a 28% cap on the value of tax preferences, including tax-exempt interest for municipal bonds, according to knowledgeable sources.

The White House is expected to continue to push the 28% cap even though state and local issuers insist the administration’s senior economic advisors told them late last year that the proposal had been dropped.

Market participants said on Tuesday that they are confused, having believed the administration was sympathetic to their concerns against the proposal, which they had warned would increase borrowing costs for issuers.

“The administration understands the importance of tax incentives for municipal finance,” a White House official said on Monday after repeated requests for comment on a previous story. “That’s why we have supported Build America Bonds and why we did not include the municipal bond tax exemption in the president’s State of the Union proposal to eliminate tax incentives for millionaires. But the sdministration has no plans to revisit the specific September proposal that would impose a 28% across-the-board limit on the value of tax preferences for high-income households.”

The cap, which is to be included in the budget request released on Feb. 13, would limit the value of tax-exempt interest from muni bonds as well as other tax expenditures and deductions to 28% for all individuals with $200,000 or more of taxable income and married couples with $250,000 or more.

Market participants appear to have been confused about statements made by administration officials. First, the officials repeatedly expressed their support for tax-exempt bonds. They also said they supported the jobs bill pushed by Senate Democrats, which dropped the 28% cap. It failed to gain traction in Congress.

The administration’s “Blueprint for an America Built to Last,” released Jan. 24, also did not include the cap on tax preferences.

Still, the 28% cap is an ominous sign for the muni market. It was in the president’s jobs bill and will appear in this year’s budget, suggesting that it may be a place-holder for tax reform in the future.

Bill Daly, senior vice president for government relations at Bond Dealers of America, said it’s a bad idea for the White House to repropose the same proposal from last year.

“It runs contrary to the idea that they want to encourage investment in infrastructure,” Daly said. “It’s distressing because the White House had told people they weren’t going to do it. We thought that they had realized this was not part of tax parity. It’s not an issue of upper income taxpayers paying a fair share, it’s how state and local governments finance.”

Lars Etzkorn, program director for federal relations for the National League of Cities, said he will be disappointed to see the proposal in the president’s budget.

“The state and muni tax exemption provides the majority of infrastructure in this country and pays for lots of jobs,” Etzkorn said. “With cities still cutting budgets, we are taking a hit right now in job creation on the local level. Anything that would further retard that we can’t think would be good for the economy. It would have a lasting detrimental impact amplified over time.”

State and local groups have vowed to accelerate and amplify their conversations with Congress about the importance of tax-exemption and the negative impact to state and local governments.

Jennifer DePaul writes for The Bond Buyer.


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