Peter Schweizer of the Government Accountability Institute has an article calling on Congress to start taxing municipal-bond interest as ordinary income:
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.
According to Schweizer, the Joint Committee on Taxation estimates that eliminating the tax break for municipal-bond interest would generate $124.4 billion over the next decade. John McKinnon and Andrew Ackerman of the Wall Street Journal report that the Obama administration and congressional Republicans seem open to the idea of at least curbing this deduction:
Even if the two sides reach a deal on the fiscal cliff—a combination of automatic tax increases and spending cuts scheduled to hit in early January—it might not include taxing municipal-bond interest. But the idea could resurface next year if Congress moves to overhaul the tax code, as many expect. It is unclear whether the approach would apply only to newly issued bonds.
This sounds promising, and it could be part of a larger tax deal that could advance pro-market objectives.