Tax Reform (State and Local Tax Deduction and Municipal Bonds)

 

 

 

Dear Majority Leader McConnell, Minority Leader Schumer, Speaker Ryan, Minority Leader Pelosi, Chairman Hatch, Ranking Member Wyden, Chairman Brady, and Ranking Member Neal:

The nation’s governors appreciate congressional efforts to reform and improve federal tax policy.  Federal and state tax systems are complex and often interconnected.  Therefore, as Congress considers reforms, we urge you to maintain the balance between state and federal tax systems by preserving the income exclusion for municipal bond interest and the deductibility for state and local taxes.

The financing engine that drives U.S. infrastructure is the $3.8 trillion municipal bond market.  Changes to federal laws and regulations should not increase issuance costs to states for municipal bonds or diminish investor demand for them.  If federal changes make issuing municipal bonds cost-prohibitive for states and local governments, then fewer projects could be funded, taxes could rise, fewer jobs created, and economic growth will suffer.

Governors also believe that no federal law or regulation should preempt, limit, or interfere with the sovereign rights of states.  A mark of sovereignty includes the ability to develop and operate revenue and tax systems.  Deductibility of state and local taxes has contributed to the stability of state revenues that are essential for providing public services.  We encourage you to avoid changes to the tax code

that would undermine the ability of state and local governments to meet the needs of the citizens whom we all serve.

Eliminating state and local tax deductibility, moreover, exposes a higher share of an itemizing taxpayer’s income to federal taxation because it adds back mandatory payments of state and local taxes already paid, as taxable income.

Federal tax reform requires an intergovernmental partnership because decisions at the federal level will affect state and local governments profoundly. We look forward to working with Congress on bipartisan tax reform to maintain balance between our systems and modernize the federal tax system to meet the needs of our citizens.

Sincerely,

cc.  House Ways and Means Committee members
Senate Finance Committee members