NAST Opposes Extending Disallowance of Exempt Interest Expense

Stephen D. Adams, on behalf of the National Association of State Treasurers, Washington, has urged Treasury not to propose the extension of the pro rata disallowance of tax-exempt interest expense to all corporations. NAST believes the proposal would discourage investment in state and local government securities and increase the cost of borrowing for short-term and capital financing.

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January 27, 1998

The Honorable Robert E. Rubin

RE: Pro Rata Disallowance

Dear Mr. Secretary:

[1] On behalf of the National Association of State Treasurers, I am writing to urge you to refrain from proposing the extension of the pro rata disallowance of tax-exempt interest expense to all corporations. As the chief fiscal officers of our fifty states, we believe this proposal would further discourage investment in state and local government securities, and would, correspondingly, increase the cost of borrowing for short-term and capital financing.

[2] A similar proposal, included in President Clinton's Fiscal Year 1998 budget, would eliminate the "two-percent de minimis rule" for corporate purchases of certain tax-exempt municipal bonds. Under the proposal, any corporation that earned tax-exempt interest would be disallowed a proportional share of its interest expense deduction. However, the proposal was rejected by Congress because of its harmful impact on the state and local municipal securities market.

[3] There is no doubt that sound fiscal policy and the historic 1997 Budget Agreement have lead to lower interest rates and have encouraged savings and investment. The recently enacted tax and budget plans also are commendable because they did not impose unreasonable restrictions on state and local governments' abilities to finance vital functions, The National Association of State Treasurers strongly supports the goal of a balanced Federal budget, but urges you to oppose inclusion of this proposal in the Fiscal Year 1999 Budget. The proposal represents yet another attempt to diminish the ability of state and local governments to efficiently finance their public needs.

Sincerely.

Stephen D. Adams