“I believe reform should protect the middle class, promote economic growth and build on the Fiscal Commission's model of reducing tax expenditures so there is enough savings to both lower rates and lower the deficit,” the president said.
The Fiscal Commission listed taxable interest for newly issued municipal bonds among the priorities for “fundamental tax reform by 2012.” More recently, a bill introduced by Sen. Ron Wyden (D-Ore.) would replace municipal bonds' tax-exempt interest with tax credits.
Estimates for the federal revenue lost to hospital muni bonds' tax-exempt interest vary. The Joint Committee on Taxation estimated $1.8 billion in 2010. The Office of Management and Budget put the figure at $3.5 billion that year, $3.6 billion in 2011 and $26.8 billion between 2012 and 2016.
Lost tax revenue represents a trade-off for lawmakers, says Tracy Gordon, an assistant professor at the University of Maryland and a Brookings Institution visiting fellow. Tax subsidies provide support for public policy priorities, but at the cost to federal revenue, she says. Fewer tax exemptions would broaden the tax base and potentially allow for lower tax rates.
For policy-makers, the question becomes how much federal subsidy to grant to achieve policy goals and how best to do so, Gordon says. Muni bonds have been criticized for most significantly benefiting households with high wealth.
Gordon said tax credits would eliminate that advantage for high-wealth investors and could give the federal government more flexibility to influence investment by adjusting incentives.
For healthcare borrowers, it's too soon to say where a tax reform debate is headed, says Michael Rock, senior associate director of federal relations for the American Hospital Association. But recent proposals to eliminate tax-exempt muni bond interest have led to a “heightened level of anxiety” among healthcare finance insiders, says Chuck Samuels, an attorney who represents the National Association of Health and Education Facilities Finance Authorities.
Samuels says finance officials fear that upcoming reform efforts could be similar to the overhaul of 1986 and muni bonds' tax exemption could be in jeopardy.