Book Description

In the current political climate of advocating a reduction of federal expenditures and reducing the federal deficit, there continues to be discussion by President and the U.S. Congress of reforming the Internal Revenue Code (the “Code”). The recent passage of the American Taxpayer Relief Act of 2012 (“Fiscal Cliff Act”) has not resolved the federal budget deficit issues. Prior to the passage of the Fiscal Cliff Act, the repeal or limitation of several deductions or exclusions in the Code know as tax expenditures, were being considered. One of these expenditures was the exclusion of interest on state and local bonds provided for in section 103 of the Code. There are proposals by the President and Congress to eliminate or substantially reduce federal income tax exemption of interest income received from municipal debt. Not since the passage of the Tax Reform Act of 1986 has there been sufficient political momentum to consider eliminating or restricting tax-exemption of municipal debt. This paper will support the premise that Congress should not eliminate or limit the exclusion of interest on state and local bonds through section 103 of the Code because the alternatives financing options for state and local government entities will not reflect the demand of investors; remove state and local control of their debt financing; and create an inefficient federal bureaucracy for funding of state and local projects.