There are numerous issues that will be discussed and dealt with in Washington throughout 2016 that will be of acute interest to GFOA members. These include ongoing discussion related to the federal budget and deficit, which could include proposals to curtail funding to state and local governments, as well significant reforms to the federal tax code. The tax reform discussion will certainly include changing or eliminating the federal tax exemption on municipal bond interest as well as deductions for state and local taxes. Proposals to regulate public pensions plans, and new rulemaking from the SEC and MSRB related to the Dodd Frank Act and other areas involving state and local governments will come forward throughout the year. The GFOA’s Federal Liaison Center will monitor these legislative and regulatory activities and work to advance the public policy positions adopted by the GFOA membership. The association’s legislative and regulatory priorities for the year are listed below.
House and Senate leaders will continue to work developing legislation to overhaul the federal tax code this year. There are numerous implications for state and local governments in this debate, and the FLC will advocate strongly on behalf of our members and work with the entire state and local government community on these issues.
- Changes to Municipal Securities. Similar to activities in 2014 and 2015, Congress and the Administration will likely continue to present tax proposals that could diminish or eliminate the federal tax exemption on municipal bond interest. Any of the options brought forward could have a negative effect on state and local governments and increase their bond issuance costs. GFOA will oppose any plans to cap the amount of municipal bond interest that taxpayers can exclude from their federal taxes and oppose any proposals to eliminate the federal tax exemption altogether. GFOA will work with our state and local government association partners to educate Congress and the Administration on both the importance of tax-exempt bonds and how they serve as the primary finance vehicle to meet our country’s infrastructure needs.
- Deductibility of State and Local Taxes. GFOA will work to ensure that any proposals to limit or eliminate the federal deduction of state and local taxes are defeated. GFOA continues to support legislation that would permanently allow taxpayers to deduct state and local sales taxes on their federal tax return.
Collection of Taxes on Remote Sales
GFOA supports legislation that would allow for the collection of taxes from sales made by remote means (e.g., internet and catalog), and will work with its state and local government partners to push for passage this legislation – the Marketplace Fairness Act and the Remote Transactions Parity Act – in 2016. However, GFOA will oppose any efforts to include provisions in legislation that would limit the amount of tax that local governments can collect on remote sales as well as oppose mandates for state and local governments to simplify their telecommunication tax structures before being able to collect taxes on remote sales.
Preemption of State and Local Government Taxes
- Telecommunications Taxation: GFOA, in conjunction with our other local government partners – the National League of Cities, the National Association of Counties, and the U.S. Conference of Mayors – will vigorously oppose efforts to preempt state and local governments from assessing taxes and fees on various communication related goods and services.
- State and Local Hotel and Rental Car Taxes: GFOA opposes any efforts by Congress restricting the ability of states and localities from collecting hotel taxes on the full rental price that hotel occupants pay when renting rooms through online travel companies (e.g., Expedia, Travelocity, Hotels.com). Additionally, GFOA opposes any efforts to preempt the ability of state and local governments to levy rental car taxes and fees that are appropriate for their jurisdiction.
- Internet Tax Freedom Act: GFOA opposes legislation that would make permanent the Internet Tax Freedom Act’s (ITFA) moratorium on state and local government taxes on internet access. As more services transition from telecommunications and cable to broadband, the scope of what the ITFA covers will greatly expand, even if the ITFA’s current language remains unchanged. To protect the tax bases and fiscal strength of state and local governments, we could not support anything more than a short-term extension of the ITFA, which would provide more time for the full scope of the transition from telecommunications/cable to broadband to occur, and a better sense of the costs that ITFA preemption on state and local governments would impose to be more reliably and meaningfully assessed.
In addition to the tax reform efforts noted above that will affect municipal securities, there are many other bond issues of interest to GFOA members that will have the attention of GFOA’s Federal Liaison Center. These include:
- Disclosure Standards. In July of 2012, SEC released a proposal on the need for greater issuer disclosure standards for governments that issue municipal securities. The recommendations in the report, which includes both changes to SEC rules and legislative efforts to set disclosure and financial information standards, will likely be brought forward in 2016. GFOA and its state and local government partners will work to oppose such efforts.
- Bank Qualified Debt Limit. GFOA will be working with our state and local government and industry partners to increase the bank qualified debt limit from $10 million to $30 million. The $10 million amount was set in 1986, and aside from a temporary change to $30 million in 2009 and 2010, the amount has not changed. GFOA will continue to support HR 2229 – the Municipal Bond Market Support Act, which would permanently increase the annual bank qualified debt limit to $30 million, and have it indexed to inflation thereafter.
- Legislation to Classify Municipal Securities as High Quality Liquid Assets (HQLA). In September of 2014 the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency (OCC) approved a rule establishing minimum liquidity requirements for large banking organizations. The liquidity coverage ratio rule was designed to ensure that large banks maintain liquid assets that can easily be converted to cash during times of national economic crisis. The rule identifies High Quality Liquid Assets (HQLA) to meet this requirement, but fails to include municipal securities in any of the acceptable investment categories (despite including foreign sovereign debt!).
Not classifying municipal securities as HQLA will increase borrowing costs for state and local governments to finance public infrastructure projects, as banks will likely demand higher interest rates on yields on the purchase of municipal bonds during times of national economic stress, or even forgo the purchase of municipal securities. The resulting cost impacts for state and local governments could be significant, with bank holdings of municipal securities and loans having increased by 86 percent since 2009.
In the absence cooperation from the FDIC and OCC in amending the rule to account for investment-grade municipal securities, the GFOA is working with bipartisan champions in Congress to change the rule through legislation (HR 2209).
- Implementation of the Dodd-Frank Act. Following the 2013 approval of a final rule on the definition of Municipal Advisor the GFOA is expecting additional regulations that affect municipal securities issuers and the professionals they hire to be proposed and finalized this year by the MSRB. As additional proposed regulations are issued we will comment in order to protect the interests of state and local governments. These expected new rules include: a new regulatory framework over financial advisors and changes to regulations over broker/dealers.
Public Pensions and Retirement Savings
GFOA along with other Public Pension Network members representing both state and local governments and retirement systems will continue to educate members of Congress regarding the true fiscal condition of public pension systems, as well as oppose congressional proposals to undermine state and local governments authority to effectively govern and finance their pension plans.
Health Care Reform Implementation
GFOA will continue to monitor regulations related to the implementation of the Patient Protection and Affordable Care Act (ACA), which remains largely the jurisdiction of the Departments of Health and Human Services, Treasury and Labor. These agencies continue to publish guidance to help define what the law requires of employers, insurers and participants alike. GFOA will advocate for a regulatory approach that allows states and localities to utilize the most cost effective means of complying with the health care law, while offering appropriate benefit options to employees and retirees. GFOA will also be closely monitoring legislative efforts to reform the ACA, specifically any proposed modifications to or repeal of the Cadillac Tax.
On December 18, Congress passed legislation that will delay implementation of the excise tax on high-cost health insurance plans (the Cadillac tax) by two years. Adopted as part of the Patient Protection and Affordable Care Act (ACA), the Cadillac Tax required that in 2018, plans costing more than $10,200 annually for individuals and $27,500 for families to be taxed at 40 percent of the costs above these limits. Repealing the Cadillac tax levied on high-cost employer-sponsored health coverage gained bipartisan and bicameral support throughout the last few months of 2015.
GFOA will monitor and inform our members about various short and long term proposals to manage the federal budget, including cuts to programs important to state and local governments.