Week in Insights: Ending Muni Bond Exemptions Would Harm Public

Eliminating the municipal bond interest tax exemption to offset federal tax cuts is a bad idea. Doing so would shift the tax burden from the federal level down to states and localities, forcing local governments to pass increased costs of borrowing onto residents.

Municipal bonds allow local governments to raise necessary capital for critical infrastructure and maintenance. Bond-financed projects include schools, roads, and city buildings. Municipalities sell bonds to investors in exchange for a guaranteed return on their investment. The prospect of tax-exempt interest attracts investors and convinces them to accept a lower interest rate than they otherwise would.

This preferential tax treatment means municipal bonds often offer several points less in interest than other bond offerings. The flipside of that arrangement is that municipalities can borrow money at lower rates.

Removing the tax exemption would make borrowing significantly more expensive for municipalities, as investors would demand higher yields to make up for the lost tax benefit. An investor that might accept 2% tax-free may want a rate closer to 3% or more if that interest is suddenly taxable.

These higher borrowing costs would lead to property and sales tax hikes or a cutback on services for residents. While the policy headline may be that bond investors will start paying their fair share on interest accrued by their investments, the economic incidence would chiefly fall on property owners and taxpayers.

Ending the municipal bond tax exemption is a roundabout way to impose a federally compelled state tax hike across the country. Rather than reduce overall tax pressure for taxpayers, such a policy would shift costs to local governments and residents—jeopardizing public projects and services and leaving states and cities in the hot seat.

—Andrew Leahey

Welcome to the Week in Insights for Bloomberg Tax’s latest analysis and news commentary. This week, experts examined how partnerships can prepare for a corporate alternative minimum tax, reasons to reform California’s sales tax system, and more.

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Insights

Latin American Tax Policy Forum founder Lucas de Lima Carvalho says the same challenges that affect the Pillar Two initiative could affect the OECD’s recommended tobacco tax reforms for Latin American and Caribbean countries.

State tax experts Jason DeCuir and Mary Robinson examine efforts to reform Louisiana’s funding structure, noting that the proposal would allow some property tax laws to become statutes.

Forvis Mazars’ Scott Austin, Michael Cornett, and Howard Wagner say partnerships should keep extra records to prepare for a potential corporate alternative minimum tax, noting that they’ll need to spend more time and money to ensure compliance.

San José State University professor Annette Nellen examines California’s city sales tax system, saying tax laws from the 1930s no longer reflect modern consumption habits.

DLA Piper’s Steve Dixon and Henry Cheng say proposed Treasury regulations undermine the IRS Independent Office of Appeals and that the Chevron doctrine’s demise “upended the order of things” on disputes.

Stout’s Jerry Schwartzman, Joel Wukelic, and James Lewis say companies unfamiliar with state sales tax rules may find compliance tricky and should seek professional advice to prevent audits.

MinterEllisonRuddWatts’ Simon Akozu and Steven Liu explain New Zealand’s approach to tax compliance and say that businesses can adopt transfer pricing processes to meet its requirements.

Columnist Corner

Technically Speaking design by Jonathan Hurtarte/Bloomberg Tax

To discourage tax-loss harvesting and other avoidance strategies, US legislators should consider taxing unrealized gains or drastically reducing capital gains rates, Andrew Leahey argues in his latest Technically Speaking column.

Tax planning’s complexity and costs make them “inaccessible to average taxpayers, leading to a push-pull dynamic with efforts to make the tax code progressive,” Andrew says, adding that tax policies are more equitable when they limit opportunities and incentives to work around them. Read More

News Roundup

Wealthy Ease Back on Rush to Use Expiring Estate Tax Break

The pressure on wealthy Americans to use their elevated estate tax exemption has eased as President-elect Donald Trump heads back to the White House. Read More

Illinois Sales Tax Law Pelted With Constitutional Challenges

Illinois is seeing a surge of litigation challenging the constitutionality of its complex sales tax law for remote retailers, with several cases in front of the state tax court. Read More

IRS Vows to Issue Rules on Previously Taxed Income by Year’s End

A long-delayed set of proposed regulations on the tax treatment of previously taxed income should be issued by the end of the year, an IRS official said. Read More

Opportunity Zone Backers See Trump Win Boosting Extension Odds

Investors and tax practitioners see President-elect Donald Trump’s return to the White House and a Republican-led Congress as an opening to boost the opportunity zone tax incentive that aims to reward investment in underserved communities. Read More

Tax Management Memorandum

Recent US Supreme Court and Texas district court ERISA decisions may affect pensioners’ appeal of a denied standing claim in a case alleging fiduciary breach against New York City pension plans, despite the exemption of public sector plans from ERISA, notes benefits lawyer Evelyn A. Haralampu.

Career Moves

André Vermeulen joined Squire Patton Boggs as director of its tax strategy and benefits practice in Ireland.

If you’re changing jobs or being promoted, send your submission to TaxMoves@bloombergindustry.com for consideration.