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Fiscal Cliff Deal Does Not Include Changes to Municipal Bond Interest Tax Exemption

Automatic Spending Cuts and Other Tough Decisions Delayed for Two Months

January 2, 2013

The fiscal cliff deal Congress passed late yesterday, The American Taxpayer Relief Act, to protect tax breaks for middle and lower-income tax payers, is considered to be short term solution that simply delays the more difficult decisions for two months. Good news for cities, the legislation does not include any changes to current tax exemptions for municipal bond interest. 

 

However, the tax exemption will continue to be on the table in the next round of negotiations.   The agreement also reduced the total amount of the excepted sequestration by $24 billion by delaying the cuts for two months.  President Barack Obama is expected to sign The American Taxpayer Relief Act today.

Debate over the nation’s fiscal matters is expected to continue and increase over the next several months. In addition to decisions on sequestration, the country is likely to hit the debt ceiling in February. The current continuing resolution will also expire March 31, and Congress will need to act to avoid a government shutdown. A large scale reform of tax policy is also scheduled to happen in 2013.

Municipal Bond Interest Exemption

Municipal bond interest provides a significant benefit to investors and allows cities access to investors they typically would not reach in the taxable bond market. If the bond interest exemption is eliminated or limited, the costs for infrastructure financing for things like schools, roads, sewer systems, bridges and fire stations will increase.

Cities are strongly encouraged to contact their congressional representatives immediately and urge them to maintain the tax-exempt status for municipal bonds. A sample letter is available on the League’s website.

Sequestration

The temporary two-month delay of across the board cuts to federal programs, or sequestration, will raise the federal deficit and is expected to trigger a second fiscal cliff.  Sequestration will affect program critical to local government, including include the Community Development Block Grant (CDBG), HOME Investment Partnership, COPS and Byrne Justice Assistance Grants.

For more on federal sequestration please visit the League’s website.



 
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