New group launches to protect tax break for municipal bonds

Nicholas also said the examination of the tax exemption was a stark contrast from the last time the tax code was overhauled more than a quarter-century ago.

“If you go back to 1986, there was never a real discussion about eliminating the exemption and replacing it,” Nicholas said.

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Under the current setup, state and local governments sell municipal bonds to fund roads, schools, hospitals and other projects. In exchange for basically giving the government a loan, investors get interest payments in return. 

But recently, the back-and-forth over Mitt Romney’s tax reform plan has sparked questions about whether the GOP presidential nominee would look to limit the tax exemption for that municipal bond interest.

The president’s fiscal commission, known as Simpson-Bowles, also curbed the preference, and President Obama’s 2011 jobs bill proposed limiting the amount of municipal bond interest that the wealthy could exclude.  

Backers of the municipal bond exemption are just one of the groups mobilizing support for their tax preference, with lobbyists for the mortgage interest deduction and charitable deduction also closely watching the tax reform debate.

Lawmakers on both sides of the aisle have said they want to reduce tax rates and get rid of tax incentives in the process. But Sen. Charles Schumer (D-N.Y.) said Tuesday he wanted to use tax reform to reduce the deficit but not take down the top rate. 

Schumer also suggested he wanted to preserve tax breaks like the deduction for mortgage interest, which he said helps the middle class. 

Nicholas said that the new Municipal Bonds for America would provide policymakers and the media white papers, case studies and other information on why the current preference for bonds is needed. 

He added that the group would also bring local officials to Washington to discuss the issue with policymakers here, and that Municipal Bonds for America was looking to add officials from larger cities like Baltimore. 

“We’re hoping that this will be almost one-stop shopping, on why the muni tax exemption is important — and why, if you reduce it, it will be negative for issuers and investors,” Nicholas said. 

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