2016-06-03 National Governors Association

Political Subdivisions

The Honorable John Koskinen, Commissioner
Internal Revenue Service
U.S. Department of the Treasury
1111 Constitution Avenue, N.W.
Washington, D.C.  20044

RE: Proposed IRS Definition of “Political Subdivision” (REG-129067-15)

Dear Commissioner Koskinen:

On behalf of the nation’s governors, the National Governors Association (NGA) writes to urge withdrawal of the above-captioned proposed rule by the U.S. Department of the Treasury’s Internal Revenue Service (IRS) because it encroaches on the traditional powers of sovereign states to regulate their political subdivisions.  Alternatively, NGA calls on the IRS to narrowly tailor it to reach the stated objectives in the least restrictive manner to state sovereign authority.

The long-standing definition of “political subdivision,” applied to determine whether an entity may issue tax-exempt bonds, does not interfere with the sovereign authority of the states.  26 CFR § 1.103-1(b) (2016).

The IRS’s proposed rule, however, oversteps because of its introduction of new elements, specifically, whether an entity actually performs a “governmental purpose” with no more than an incidental benefit to private persons, and operates “under public control”.  NGA acknowledges that the tax-exempt status of municipal bonds should benefit those investments that deliver a public purpose, but this draft rule overreaches into the sovereign authority of states to structure and organize.

NGA is concerned that the non-exclusive criteria that frame these new elements establish a subjective, rather than objective structure for federal regulators to determine whether an entity qualifies as a “political subdivision.”  The U.S. Supreme Court is clear that “interfering with the relationship between a State and its political subdivisions strikes near the heart of State sovereignty.”  Sailors v. Bd. Of Education, 387 U.S. 105, 1070108 (1967).

Governors support the preservation of public financing, notably tax-exempt financing, because it is the primary method to raise capital for a wide range of public projects.  Federal statutory and regulatory policies should neither increase issuance costs to states and local governments, nor diminish retail and institutional market demand for bonds issued by states and their political subdivisions.

Sincerely,

Scott Pattison
Executive Director and CEO