A tax hike Republicans could cheer?

posted at 10:01 am on December 15, 2012 by Ed Morrissey

Actually, this is not so much a tax hike as a deduction cut.  Peter Schweitzer proposed a “trillion dollar tax increase” that should find bipartisan appeal without disturbing capital investment or the middle class, and perhaps even encouraging capital to flow more to private markets.  Why not end the tax exemption for municipal bonds — all munis, and not just those held by the top earners, as Obama proposes?

Common ground might be found in the $3.7 trillion municipal bond market. President Barack Obama has proposed limiting or ending the tax-exempt interest on municipal bonds for upper income Americans. Republicans would be wise to agree to Mr. Obama’s proposal and expand it to include the tax exemptions for all newly issued municipal bonds, regardless of income. According to the Congressional Joint Committee on Taxation, doing so would yield an estimated $124.4 billion over the next ten years.

Why would Republicans agree to eliminate a tax break? Simple: municipalities have become big spenders swimming in debt. Low interest rates and the current tax exemption make borrowing money cheap, thereby encouraging debt. The Federal Reserve reports that state and local government debt doubled over the last ten years, rising from $1.4 trillion in 2002 to $3 trillion in 2011. Shrink the incentive to bankroll big spending and you shrink the size of government—something most Republicans say they support.

But there’s another reason Democrats and Republicans can find common ground in ending tax breaks on municipal bonds: they’re rife with cronyism.

Some municipal bonds are issued for a city’s essential services, such as sewers and roadways, but many others go for non-essential, corporate enterprises. When local governments pick winners and losers, they force others to compete with government-funded cronies financed at lower rates than private companies enjoy—again, a theme Republicans rail against. That injects more corporate cash into local politics, something Democrats speak out against.

If state and local governments had to be more discriminating about which projects to fund with municipal bonds, perhaps they wouldn’t be so keen on green lighting bonds like the one the Poway United District, a subsidiary of the greater School District of San Diego, issued in 2011. Under the guise of a “capital appreciation bond,” the district approved a $105 million bond that will end up costing $982 million by 2051. The reason: payments on the debt are deferred 20 years, dramatically increasing the total cost of the borrowing. That means bondholders score a big return on their investment, but do so on the backs of taxpayers.

At least San Diego’s deal was done in the name of education; many others use taxpayer monies to fund sports stadiums. Indeed, Bloomberg News recently estimated that tax exemptions on interest paid by municipal bonds for sports structures rob roughly $146 million a year from the U.S. Treasury.

This is a part of the sports-stadium funding issue about which we rarely hear.  The borrowing costs local and state taxpayers a bundle (for negligible economic results, as the same entertainment dollars would be spent elsewhere if sports teams moved), but the tax-free interest income means that taxpayers in other states essentially subsidize the deals, too.

There is a more fundamental reason to consider this tax increase, one that will probably mean an end to any Democratic support.  Cities and states are drowning in debt, a crisis that has been overshadowed by the fiscal crises at the federal level.  They borrow more and more money through the sale of these bonds, which come cheaper because of the tax-free income they produce for those who buy them.  At some point, either these cities and states will have to budget appropriately in order to get themselves out of the red, or the federal government will have to bail them out.  We could accelerate the pressure to do the former by making these munis a lot less attractive to investors — who might then decide that the private sector is a more worthwhile investment for their capital rather than the public sector.

Schweitzer makes the same argument, while noting that it won’t stop municipal borrowing.  It might, however, slow down bond sales enough to force cities and states to start working on real reform.  And at least taxpayers in flyover country won’t be paying for the interest on the latest sports cathedral on one of the coasts, nor the other way around, since my own state is the latest to foolishly decide to subsidize an NFL stadium.  Los Angeles was rumored to be the home of the Vikings if the deal didn’t go through, but now Angelenos can take heart in the fact that even though they can’t buy a ticket to a Vikings game, they contribute to the stadium deal in some small manner anyway.

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Sounds good to me, they can still take advantage the low interest rates and maybe the public will stop getting the payments for the dumbest things going.

Cindy Munford on December 15, 2012 at 10:06 AM

End deductions for state and local income taxes. Anything that puts a heavier tax burden on those who vote for higher taxes…THAT’S what I’m for.

Doug Piranha on December 15, 2012 at 10:07 AM

This cannot be right! There has to be a catch! I mean, after all, it actually sounds reasonable!

OldEnglish on December 15, 2012 at 10:12 AM

The federal government consumes 25% of this nations gross domestic product. That is capital that could be used in the private sphere to create more wealth.

Any additional tax revenue going to the federal government should be a complete non-starter because it addresses the symptom vice the cause of our problems.

Next.

Meat Fighter on December 15, 2012 at 10:12 AM

It will never fly simply because it makes sense.

docflash on December 15, 2012 at 10:18 AM

In my opinion, an absolutely terrible idea. Ed, you forgot about Senior citizens who have invested in muni bond mutual funds to generate some tax free income to supplement social security. I planned my retirement in that manner. Municipal bond funds paid less interest, but were much safer against large swings in the stock market. Exempt seniors from the tax and it might be a good idea.

elintex on December 15, 2012 at 10:21 AM

…I’m all in!

KOOLAID2 on December 15, 2012 at 10:30 AM

muni-bonds are a ticking time bomb in this country, don’t count on any move against them.

rob verdi on December 15, 2012 at 10:32 AM

But there’s another reason Democrats and Republicans can find common ground in ending tax breaks on municipal bonds: they’re rife with cronyism.

Perhaps we should tax cronyism.

Bundlers or heavy political contributors who successfully get a government contract or grant could be taxed at three times their normal marginal tax rate.

Perhaps then everyone really would be paying their “fair share.”

MessesWithTexas on December 15, 2012 at 10:40 AM

what norquist would say?

nathor on December 15, 2012 at 10:51 AM

Add to eliminating the deductability the current battle in bankruptcy court in CA over whether San Bernardino and Stockton will be able to haircut the bondholders AND the state pension funds.

The glory days for muni financing are OVER one way or the other. See here for more.

mbecker908 on December 15, 2012 at 11:01 AM

Sure, 122.4 divided by 10 years …solutions in billions, debt in trillions. That’s the politicians way of saying “Look over there! Shiny!” without doing anything nearly substantial enough.

Fenris on December 15, 2012 at 11:04 AM

Look at gigolo near-billionaire John Kerry’s tax returns when he ran in 004. Huge income from munis. Tools like Kerry would get slammed were this to pass. It won’t.

philw1776 on December 15, 2012 at 11:10 AM

Deduction cuts are spending cuts, and we should be all for them. It should be the Republican answer to Democrat demands for rate hikes.

Count to 10 on December 15, 2012 at 11:11 AM

In my opinion, an absolutely terrible idea. Ed, you forgot about Senior citizens who have invested in muni bond mutual funds to generate some tax free income to supplement social security. I planned my retirement in that manner. Municipal bond funds paid less interest, but were much safer against large swings in the stock market. Exempt seniors from the tax and it might be a good idea.

elintex on December 15, 2012 at 10:21 AM

All this astronomical spending isbecause of seniors. So no. You want yourMedicare and SSI then you pay. And you say Thank You.

Spliff Menendez on December 15, 2012 at 11:13 AM

The federal government consumes 25% of this nations gross domestic product. That is capital that could be used in the private sphere to create more wealth.

Any additional tax revenue going to the federal government should be a complete non-starter because it addresses the symptom vice the cause of our problems.

Next.

Meat Fighter on December 15, 2012 at 10:12 AM

It is worse than you know, because the government purchases made through the tax code in the form of deductions and credits aren’t counted in that 25%. The reality is that the Government is consuming more like a third of GDP, and cutting deductions and credits is just as important as cutting expenditures that appear in the budget.

Count to 10 on December 15, 2012 at 11:16 AM

Deduction cuts are spending cuts, and we should be all for them. It should be the Republican answer to Democrat demands for rate hikes.

Count to 10 on December 15, 2012 at 11:11 AM

How is taking more money from the private sector a spending cut?

Spliff Menendez on December 15, 2012 at 11:17 AM

End deductions for state and local income taxes. Anything that puts a heavier tax burden on those who vote for higher taxes…THAT’S what I’m for.

Doug Piranha on December 15, 2012 at 10:07 AM

That is another great solution to generating the tax dollars needed to pay for this metastasizing federal government. I would add ending all mortgage deductions for jumbo loans (greater than 400K, I believe). In other words, hit the blue states as hard as possible with the ramifications of their electing borrow and spend progressives.

Then start taxing all non-profits–university endowments, foundations, trusts–with assets greater than, say, $500 million.

iconoclast on December 15, 2012 at 11:27 AM

Go back to the last Clinton budget and the BS posturing will end. Abruptly.

boehner should introduce the last Clinton budget, adjusted for inflation. The caterwauling from the left will sound like a cat fight.

platypus on December 15, 2012 at 11:29 AM

Deduction cuts are spending cuts, and we should be all for them. It should be the Republican answer to Democrat demands for rate hikes.

Count to 10 on December 15, 2012 at 11:11 AM

How is taking more money from the private sector a spending cut?

Spliff Menendez on December 15, 2012 at 11:17 AM

It’s really not a difficult concept to grasp, though you might need to cut back of the Spliff’s for a while to get it.

Municipal Bonds are sold for the purpose of raising revenue to fund spending expenditures. They are purchased for the interest that they generate on the amount of the bond, the deduction one can claim on the bond combined with the interest accrued on the bond equal profit. Eliminate the deduction and you diminish the incentive to purchase the Municipal Bond, the fewer Municipal Bonds sold equals a reduction in spending by the simple fact that their is less revenue available to spend.

SWalker on December 15, 2012 at 11:34 AM

Then start taxing all non-profits–university endowments, foundations, trusts–with assets greater than, say, $500 million -$1 dollar.

iconoclast on December 15, 2012 at 11:27 AM

Because if you don’t make it -$1 dollar, they will just reassess their assets to below your cutoff point.

SWalker on December 15, 2012 at 11:36 AM

Spiff @ 11:13…….Sure, I”ll say thank you, and so will you when you’re a senior citizen. I started paying into SS in 1941 as a caddy. Had to. Payed into SS for the next 50 years. Had to. Did all the “right” things, like served four years in the military, went to college. Received a BSEE. Got married. Raised a family. Bought a house. Worked on important projects for national security. Saved money for retirement, etc., etc., and now my generation should be looked upon as the reason for “astronomical spending”. Go play with your marbles, Spiffy

elintex on December 15, 2012 at 11:41 AM

Once conservatives agree and vote for ANY tax increase, they are on the hook with democrats and the left for the economic consequences. The left wants the right to capitulate and eliminate distinction between the two parties. What did elder George. Bush. I gain from breaking his tax pledge? Remember all the accolades from the left over elder Bush flipping on read my lips, no new taxes? That’s right, neither do I. The right will be blamed for any economic situation, so they may as well stick to principle.

Cavalry on December 15, 2012 at 12:05 PM

How is taking more money from the private sector a spending cut?

Spliff Menendez on December 15, 2012 at 11:17 AM

The same way that cutting welfare or unemployment insurance payments is a spending cut. The part that matters is that the government is interfering with the economy.

Count to 10 on December 15, 2012 at 12:11 PM

That is another great solution to generating the tax dollars needed to pay for this metastasizing federal government. I would add ending all mortgage deductions for jumbo loans (greater than 400K, I believe). In other words, hit the blue states as hard as possible with the ramifications of their electing borrow and spend progressives.

Then start taxing all non-profits–university endowments, foundations, trusts–with assets greater than, say, $500 million.

iconoclast on December 15, 2012 at 11:27 AM

The simple solution would be to put an absolute cap on deductions altogether — something that Romney was actually proposing. Let the rich max out their deductions and get out of the loophole business.

Count to 10 on December 15, 2012 at 12:15 PM

Right now Hawaii is issuing a huge bond, just because it can. No immediate budgetary need for the money. The Governor just wants it around because interest rates are low. Insanity.

pat on December 15, 2012 at 12:39 PM

If one must raise taxes on anyone, seems like a good place to start would be to increase taxes on those with defined benefit pension plans whose primary benefit seems to have become they allow the owners of such plans to operate outside normal market forces while wrecking havoc on the private sector economy. The general taxpayer should be able to focus having their taxes go to support social marketplace programs for those of limited means, not stabilizing underfunded bloated programs for overpaid public workers.

Become the party of choice — offer those facing higher taxes because of their defined benefit pension plans to opt out by converting the real value in their pensions into market based 401k investments.

As soon as politicans and burrocrats of all flavors start to face the reality that their pension’s well being relies upon a thriving private sector economy, there will be a quick about face with excessive taxation and regulation to promote that positive outcome.

Make no mistake, the great divide in our contemporary politics is largely feed and stabilized by the ‘small’ cancer of defined benefit pensions and the privileged class outside of market forces it creates. Note, this includes politicians of both parties and is in part a big reason that very little useful reforms are offered by either. Cut out this cancer and our politics are likely to quickly heal to more positive outcomes for all.

drfredc on December 15, 2012 at 12:46 PM

I definitely think we as conservatives need to rethink the mantra “lower taxes always equals smaller government”

There’s definitely many cases where lower taxes actually creates bigger government (like say the fact 47% of wage earners pay zero federal income taxes) The Municipal Bond loophole is another way lower taxes actually creates bigger government.

I also know a lot of conservatives dismissed Simpson-Bowles, but if the goal is to shrink government, it would have done far more to accomplish that than simply keeping the current tax code.

BradTank on December 15, 2012 at 12:49 PM

President Barack Obama has proposed limiting or ending the tax-exempt interest on municipal bonds for upper income Americans.

Stopped reading right there.

Just who will define “upper income” (of course, any good Marxist) and — predictably — how low will that figure eventually go ($200,000 “millionaires”, the Alternative Minimum Tax, et. al.)?

More static analysis and “Stage One Thinking” (per Thomas Sowell); what will be the unintended behavioral consequences of bitter (from government’s perspective) automatons who react rationally to such a policy (of course, unforeseeable to any good Marxist)?

Two words ONLY for probably the next century — if we want to survive and manage to survive: SPENDING CUTS. SPENDING CUTS. SPENDING CUTS. Say it ’til your eyes bleed …

ShainS on December 15, 2012 at 1:20 PM

The same way that cutting welfare or unemployment insurance payments is a spending cut. The part that matters is that the government is interfering with the economy.

Count to 10

Wait…what? Increasing taxes is a spending cut just like cutting spending is a spending cut? Sheesh, if that’s the mentality these days, we truly are screwed.

xblade on December 15, 2012 at 1:35 PM

The simple solution would be to put an absolute cap on deductions altogether — something that Romney was actually proposing. Let the rich max out their deductions and get out of the loophole business.

Count to 10

A better solution would be to get out of the class warfare game….and to stop using the words of the left….like loophole….and to stop buying into the left’s argument that we have a revenue problem.

xblade on December 15, 2012 at 1:39 PM

Fiscal cliff negotiations needn’t be a game of brinksmanship. There’s at least $124.4 billion in low-hanging fiscal fruit ripe for bipartisan picking.

Just to clarify.

The argument is we should raise taxes 1 Trillion because 12% of that makes sense.

Boy they really do think we are STUPID. If we agree we are the Stupid Party.

Steveangell on December 15, 2012 at 1:46 PM

Wait…what? Increasing taxes is a spending cut just like cutting spending is a spending cut? Sheesh, if that’s the mentality these days, we truly are screwed.

xblade on December 15, 2012 at 1:35 PM

Not recognizing that deductions and credits are just more spending disguised as tax cuts is part of the problem. Do you think it would be any better if welfare and Social Security were run through the IRS?
Every credit and deduction you take is not “keeping more of what you’ve earned”, its accepting payment for something the government wants you to do. That affects the economy the same as government spending.
Whether you call it a “loophole” or not really makes no difference. It is a way of getting the government to pay you for something. I would prefer scrapping all of them, but, in case you missed it, P.BO won reelection, so you have to play his game (that is, not lowering marginal tax rates as you cut deductions), and it is mostly the high earners that the deductions in question mater for.

Count to 10 on December 15, 2012 at 2:04 PM

If you want to make it hard for the Donks to reject, take half a loaf and call it an anti-corruption measure. Allow deductions only for capital projects bonds and end the deduction mid-life if the funds are diverted for operating costs. Do not allow deductions for bonds that fund today’s operating costs tomorrow or that allow pension fund contributions to be deferred.

When the Donks cry foul, you can bargain with them on exempting rollovers of existing debt, up to 80% of the amount coming due. If enacted, it will turn the spending city politicians against inflation.

“Stop enabling the debt-addicted cities!” should be the cry, with revenue increase treated as a side effect.

njcommuter on December 15, 2012 at 2:52 PM

How does this reduce the size of the Federal government?

Mr. Arrogant on December 15, 2012 at 3:27 PM

How does this reduce the size of the Federal government?

Mr. Arrogant on December 15, 2012 at 3:27 PM

By removing subsidies for municipal debt.

Count to 10 on December 15, 2012 at 4:03 PM

According to the Congressional Joint Committee on Taxation, doing so would yield an estimated $124.4 billion over the next ten years.

In 2012, the government is spending $7.2 million a year. $124.4 billion / 10 years / $7.2 million / 60 minutes / 24 hours = 1 day and 4 hours of government spending each year.

The deficit is equivalent to 106 days of spending. This revenue would be less than 1% of the deficit.

Bloomberg News recently estimated that tax exemptions on interest paid by municipal bonds for sports structures rob roughly $146 million a year from the U.S. Treasury.

146 mil/7.2 mil = 20.28. Also known as ’20 minutes of government spending’.

Nephew Sam on December 15, 2012 at 4:15 PM

However, the total value of all deductions is apparently over $1 Trillion a year. You’ve got to start somewhere.

Count to 10 on December 15, 2012 at 4:18 PM

Here’s a tax I’ll back: 50% rate on every dollar made by a state or city/county employee above the median income of the area served. So if median income is $28,000 in a city and a city mainenance worker makes $45,000 then he pays 50% tax on every dollar between $29,000 and $45,000. That would both raise revenue and disincentivise large government paychecks, and all without having to renegotiate contracts.

shuzilla on December 15, 2012 at 4:46 PM

Playing with deductions is fiddling while Rome burns.

The Federal Government needs to be drastically downsized. It collects enough tax and has grown so far out of control that the default mindset now is FEED THE BEAST.

That has to change.

CorporatePiggy on December 15, 2012 at 4:58 PM

However, the total value of all deductions is apparently over $1 Trillion a year. You’ve got to start somewhere.

Count to 10 on December 15, 2012 at 4:18 PM

Let’s start in the “SPENDING” column.

tom daschle concerned on December 15, 2012 at 5:15 PM

Here’s a tax I’ll back: 50% rate on every dollar made by a state or city/county employee above the median income of the area served. So if median income is $28,000 in a city and a city mainenance worker makes $45,000 then he pays 50% tax on every dollar between $29,000 and $45,000. That would both raise revenue and disincentivise large government paychecks, and all without having to renegotiate contracts.

shuzilla on December 15, 2012 at 4:46 PM

Like congress would vote to tax themselves.

Steveangell on December 15, 2012 at 5:29 PM

Let’s start in the “SPENDING” column.

tom daschle concerned on December 15, 2012 at 5:15 PM

Lets start by putting deductions in the “spending” column where they belong. Yes, it would be nice to reduce the budgeted (sort of) spending too, but P.BO bussed enough non-voters to the polls to keep the Senate and his presidency, so that isn’t going to happen. Work with what you can.

Count to 10 on December 15, 2012 at 6:12 PM

Removing all those deductions might get us closer to a flat tax, too. We just won’t be able to call it that cuz they’ll still want their higher brackets for the RICH. Just to be fair.

Kissmygrits on December 16, 2012 at 9:04 AM