Markey Says Consider Impact Extending Disallowance Will Have

Rep. Edward J. Markey, D-Mass., has asked Treasury to consider the full impact the proposal to extend the pro rata disallowance of tax-exempt interest to all corporations will have on state and local governments.

Markey forwards two letters from John Bilafer, the Treasurer of the Town of Arlington, Mass., in which Bilafer expresses concern that the proposal will have adverse effects on the public financing market. If the proposal increases financing costs as Bilafer suspects, it would become more difficult for state and local governments to complete many infrastructure projects, including the construction of schools, roads, and bridges.

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January 7, 1998

Robert E. Rubin, Secretary

Dear Mr. Secretary:

[1] I am writing to call your attention to an issue of great importance to the Town of Arlington, Massachusetts in my Congressional district. Enclosed please find two letters from John Bilafer, the Treasury of the Town of Arlington which I am forwarding to you regarding the Administration's budget proposal to extend the pro rata disallowance of tax-exempt interest to all corporations.

[2] As the letters note, Mr. Bilafer is concerned that this proposal will have grave and adverse effects on the public financing market. Specifically, he is worried that such an extension would increase borrowing and leasing costs for local and state governments, because they rely heavily on the tax-exempt municipal bond market to raise capital. If these additional financing costs are incurred, as Mr. Bilafer suspects, it would become increasingly difficult for state and local governments to complete many important infrastructure projects, including the construction of schools, roads and bridges. He also notes that state and local governments might be forced to increase local taxes to overcome budget shortfalls resulting from this proposal.

[3] As you continue to formulate the Administration's budget proposal for fiscal year 1999, I urge you to carefully consider the full impact this extension will have on state and local governments across the country. At a time when we are asking state and local governments to be financially responsible for an increasing number of public programs, we must be careful not to unfairly increase their borrowing costs to undertake these important activities.

[4] I thank you in advance for your attention to this important matter.

Sincerely,

Edward J. Markey

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December 8, 1997

Congressman Edward J. Markey

Dear Ed:

[5] Attached is a copy of letter sent to the President in opposition to the Administration's position on the extension of the pro rata disallowance of tax-exempt interest. This provision will substantially increase state and local government borrowing and leasing costs.

[6] It is my understanding that fourteen of the sixteen Democrats on the House Ways and Means Committee have already written to the President to ask that the Administration's budget proposal support the current law tax treatment.

[7] On behalf of all Massachusetts cities and towns I urge you to also write to the President expressing your opposition to the extension of the pro rata disallowance rule and ask that the Administration's budget proposal support the current law with regard to this matter.

Sincerely,

John J. Bilafer

Attachment

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December 8, 1997

The Honorable William J. Clinton

RE: Forthcoming budget Proposal/Municipal Bond Market

Dear Mr. President:

[8] As the financial representative of a community that relies on a strong and stable source of demand for tax-exempt municipal bonds to provide capital for many worthwhile projects. I urge you to reconsider the Administration's position on the extension of the pro rata disallowance of tax-exempt interest expense.

[9] Last year, the budget proposal you submitted to Congress included a provision to extend the pro rata disallowance rule to nonfinancial corporations and thereby repeal the two percent de minimis rule. This provision would substantially increase state and local government borrowing and leasing costs.

[10] State and local governments rely on the tax-exempt municipality and market to raise capital for many important infrastructure projects, including the construction of roads, bridges and schools. Furthermore, many smaller governments, which do not have access to the bond market due to a poor credit rating or market inexperience, lease various types of equipment including telecommunications systems, computer systems, medical equipment, portable classrooms, school buses, police cars, firetrucks and 911 phone systems.

[11] At time when the Town of Arlington and many other Massachusetts municipalities are in the midst of planning school repair and renovation programs, it seems unwise to raise state and local government borrowing costs and render many of these projects unaffordable.

[12] Perhaps what is most unsettling about this provision is the revenue estimate. The Joint Committee on Taxation estimated last year that this provision would raise just $113 million in federal tax revenue over five years -- virtually nothing when compared with the aggregate cost increase to state and local governments and their taxpayers. Please remember that federal taxpayers are also state and local government taxpayers.

[13] Mr. President, I urge you to oppose the extension of the pro rate disallowance rule and preserve the current law tax treatment of nonfinacial corporations that hold tax-exempt municipal bonds because of the very serious implications this change would have on the ability of state and local government to provide valuable services to their communities.

Sincerely,

John J. Bilafer

cc: Massachusetts Congressional Delegation