[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]


  TAX REFORM AND TAX PROVISIONS AFFECTING STATE AND LOCAL GOVERNMENTS

=======================================================================

                                 HEARING

                               BEFORE THE

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 19, 2013

                               __________

                          SERIAL NO. 113-FC03

                               __________

         Printed for the use of the Committee on Ways and Means
         
         
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


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                      COMMITTEE ON WAYS AND MEANS

                     DAVE CAMP, Michigan, Chairman

SAM JOHNSON, Texas                   SANDER M. LEVIN, Michigan
KEVIN BRADY, Texas                   CHARLES B. RANGEL, New York
PAUL RYAN, Wisconsin                 JIM MCDERMOTT, Washington
DEVIN NUNES, California              JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio              RICHARD E. NEAL, Massachusetts
DAVID G. REICHERT, Washington        XAVIER BECERRA, California
CHARLES W. BOUSTANY, JR., Louisiana  LLOYD DOGGETT, Texas
PETER J. ROSKAM, Illinois            MIKE THOMPSON, California
JIM GERLACH, Pennsylvania            JOHN B. LARSON, Connecticut
TOM PRICE, Georgia                   EARL BLUMENAUER, Oregon
VERN BUCHANAN, Florida               RON KIND, Wisconsin
ADRIAN SMITH, Nebraska               BILL PASCRELL, JR., New Jersey
AARON SCHOCK, Illinois               JOSEPH CROWLEY, New York
LYNN JENKINS, Kansas                 ALLYSON SCHWARTZ, Pennsylvania
ERIK PAULSEN, Minnesota              DANNY DAVIS, Illinois
KENNY MARCHANT, Texas                LINDA SANCHEZ, California
DIANE BLACK, Tennessee
TOM REED, New York
TODD YOUNG, Indiana
MIKE KELLY, Pennsylvania
TIM GRIFFIN, Arkansas
JIM RENACCI, Ohio

        Jennifer M. Safavian, Staff Director and General Counsel

                  Janice Mays, Minority Chief Counsel


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of March 19, 2013 announcing the hearing................     2

                               WITNESSES

Mr. John Buckley, Professor of Law, Georgetown University Law 
  School Graduate Tax Program, Washington, DC....................    36
Mr. Scott Hodge, President, the Tax Foundation, Washington, DC...     6
Mr. David Parkhurst, Director of Economic Development and 
  Commerce Committee, Office of Federal Relations, National 
  Governors Association, Washington, DC..........................    17
Mr. Christopher Taylor, Former Executive Director, Municipal 
  Securities Rulemaking Board, Washington, DC....................    30

                   PUBLIC SUBMISSIONS FOR THE RECORD

American Hospital Association....................................    75
American Public Power Association, Large Public Power Council, 
  and Transmission Access Policy Study Group.....................    79
Bond Dealers of America..........................................    89
Breckinridge Capital Advisors, Inc...............................    98
Center for Fiscal Equity.........................................   100
City of Boerne...................................................   104
City of Coconut Creek............................................   105
City of Dallas...................................................   106
City of Lincoln Nebraska, Lincoln Public Schools, Lincoln 
  Electric System................................................   110
City of Manteca..................................................   112
City of Rancho Cucamonga.........................................   114
City of Seattle Municipal Bonds..................................   115
City of St. Petersburg...........................................   120
Clean Water Services.............................................   121
County of Newaygo Board of Commissioners.........................   122
CTIA The Wireless Association....................................   125
Eastern Municipal Water District.................................   126
Education Finance Council........................................   128
Government Finance Officers Association..........................   130
The Honorable Stephen K. Benjamin, Mayor of Columbia, South 
  Carolina.......................................................   143
Institute on Taxation and Economic Policy........................   151
Laura Morgan.....................................................   161
Lofgren Franks...................................................   163
Louis Jambois....................................................   165
Marco Lowe.......................................................   167
Missouri River Energy Services...................................   172
Moran and Company................................................   174
National Association of Bond Lawyers.............................   185
National Association of Health and Educational Facilities Finance 
  Authorities....................................................   194
National Conference of State Legislatures........................   200
National Governors Association...................................   203
National Organization of Social Security Claimants' 
  Representatives................................................   215
Public Utility District No. 1 of Chelan County, Washington.......   221
Sheila Tucker....................................................   223
Statement of the National Association of Realtors................   225
Sustainable Water Infrastructure Coalition.......................   231
Tacoma Public Utilities..........................................   238
The Associated General Contractors of America....................   241
The Minnesota Service Cooperatives...............................   248
Washington Public Utility Districts Association..................   250

 
  TAX REFORM AND TAX PROVISIONS AFFECTING STATE AND LOCAL GOVERNMENTS

                              ----------                              


                        TUESDAY, MARCH 19, 2013

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to call, at 10:05 a.m., in Room 
1100, Longworth House Office Building, the Honorable Dave Camp 
[Chairman of the Committee] presiding.
    [The advisory of the hearing follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Chairman CAMP. Good morning. The committee will come to 
order. Good morning, and thank you all for joining us today.
    As part of the committee's efforts to strengthen the 
economy, create more jobs, and increase wages for American 
families by making the Tax Code simpler and fairer, today's 
hearing allows stakeholders and members of the public the 
opportunity to share their perspectives on tax reform and tax 
provisions affecting State and local governments.
    Several items in the Tax Code directly affect State and 
local governments. The most significant and widely known 
provisions include the exclusion of State and local government 
income from Federal income tax; the itemized deduction for 
State and local income, property, and sales taxes; and various 
benefits for State and local bonds; and special rules for State 
and local government employee pensions and benefits. Other 
provisions indirectly affect State and local governments as 
well, such as the exclusion for contributions to corporate 
capital.
    Over the last several years, we have heard much about how 
the Tax Code might be changed in ways that could affect State 
and local government activity. Some such as President Obama 
argue that exclusions, such as those for State and local bonds, 
and deductions, such as those for State and local taxes, 
inappropriately provide larger subsidies for high-income 
taxpayers and have advocated limiting the value of deductions 
and exclusions or replacing them with credits. Other tax reform 
proposals have also proposed significant reform of Federal tax 
provisions that affect State and local governments. Generally 
those proposals reduce the tax expenditures associated with 
these provisions and use the money to finance either rate 
reduction or higher spending. Both Democrats and Republicans, 
including Bowles-Simpson, Domenici-Rivlin, and tax reform 
panels appointed by President Obama and then-President George 
W. Bush, have offered these proposals.
    Because such a wide range of policymakers have concluded 
that reform of tax provisions affecting State and local 
governments should be part of the discussion, it is critical to 
understand why they have come to such a conclusion, and it is 
equally critical to make sure the committee hears all sides of 
the story. Thus, in the interest of fairness, it will be 
important for the committee to examine how these Federal tax 
subsidies impact individual States.
    For example, with regard to the deduction for State and 
local taxes, consider the following: In terms of the total 
value of deductions claimed, taxpayers in just three States--
California, New York, and New Jersey--claim over 36 percent, 
more than one-third in 2010. These same States have some of the 
highest combined State and local income tax rates. California's 
State income tax rate is 13.3 percent, New Jersey's is 9 
percent, and New York's highest combined income tax rate, which 
is in New York City, is 12.7 percent. Those findings and many 
more that have been uncovered over the years raise significant 
concerns about the current Tax Code is being used to pick 
winners and losers.
    But we are not writing a tax reform bill in some ivory 
tower. Changes to the Tax Code will have a real impact on State 
and local economies, and the committee needs to hear directly 
from these stakeholders before considering any proposals as 
part of comprehensive tax reform. In addition to this hearing, 
the committee's 11 separate working groups also serve as a way 
to gather information from these stakeholders about how current 
tax laws affect them. These reports will be important to have 
as we begin to explore what changes, if any, should be 
considered, and I am hopeful they will take the opportunity to 
share their thoughts.
    I would like to thank all of you for being here today. We 
have assembled a panel of four witnesses, each of whom has a 
broad set of experiences in this area, and I am sure they will 
provide a unique perspective to the discussion, and we look 
forward to your testimony.
    Chairman CAMP. And I will now recognize the ranking member 
for the purposes of an opening statement.
    Mr. LEVIN. Thank you very much, and welcome.
    In the 11 tax reform working groups that we set up on a 
bipartisan basis, based on reports to date and my own 
participation, we are making progress toward understanding 
present laws and their pluses and minuses, and their possible 
implications for the policy challenges we face. In an important 
sense, the hearing today illustrates that challenge as we 
address tax reform.
    Republicans in the budget to be voted on this week have 
once again reaffirmed their goal of collapsing the current rate 
structure to two brackets with a top rate of 25 percent. An 
analysis by the nonpartisan Tax Policy Center has indicated 
that the rate reduction and other specific tax policies in that 
budget would cost $5.7 trillion over 10 years, yet the budget 
gives no indication or any illustration as to how to address 
this huge gap, most of which would involve Ways and Means 
jurisdiction.
    We are familiar with the President's proposal to cap 
deductions at 28 percent. Various proposals to limit deductions 
and tax preferences have been put forth in the past. I believe 
there is value in considering thoughtful proposals as we seek a 
balanced approach to deficit reduction. However, the 
differences of opinion in the testimony before us today on one 
set of tax policies, those relating to State and local 
government, illustrate the need to distinguish between rhetoric 
and reality in addressing the important issue of tax reform.
    I yield back.
    Chairman CAMP. Thank you, Mr. Levin.
    Now it is my pleasure to welcome our panel of experts, all 
of whom bring a wealth of experience from a variety of 
perspectives. Their experience and insights will be very 
helpful as our committee considers the impact of Federal tax 
reform on State and local governments.
    First I would like to welcome Scott Hodge, president of the 
Tax Foundation here in Washington, D.C. Mr. Hodge has spent 
over two decades working in tax policy, and his organization 
has provided this committee with a host of valuable data and 
insight through the years.
    Second we will hear from David Parkhurst, who joined the 
National Governors Association in 2007 and currently serves as 
its director of its economic development and commerce 
committee.
    Third we will hear from Christopher Taylor, an independent 
consultant who spent nearly 30 years as executive director of 
the Municipal Securities Rulemaking Board and now works in 
Alexandria, Virginia, as a financial consultant.
    And finally we welcome back to the committee and we will 
hear from John Buckley, the former chief of staff for the Joint 
Committee on Taxation and the former Democratic chief tax 
counsel here at the Ways and Means Committee, who is currently 
a professor of tax law at Georgetown University Law Center. And 
again, welcome back, Professor Buckley.
    Thank you all for being with us today. The committee has 
received each of your written statements, and they will be made 
part of the formal record. Each of you will be recognized for 5 
minutes for your oral testimony, and, Mr. Hodge, we will begin 
with you. You are recognized for 5 minutes.

   STATEMENT OF SCOTT HODGE, PRESIDENT, THE TAX FOUNDATION, 
                         WASHINGTON, DC

    Mr. HODGE. Well, thank you, Mr. Chairman, and Ranking 
Member Levin, Members of the Committee. I appreciate the 
opportunity to contribute to this really important discussion 
of fundamental tax reform. And I think, as all of you 
recognize, one of the obvious goals of tax reform is to 
eliminate those parts of the Tax Code that have unintended side 
effects that outweigh whatever sort of policy reasons motivated 
their original creation. At the top of this list, actually, 
should be the various tax provisions benefiting State and local 
governments.
    In the same way that a mortgage interest deduction may 
encourage some families to purchase a more expensive home than 
they would otherwise afford, the taxes-paid deduction and 
municipal bond exemptions encourage many States to tax more, 
spend more, and borrow more than they otherwise would. Academic 
research indicates that the taxes-paid deduction leads to 
greater reliance on tax-deductible taxes, such as progressive 
income taxes and property taxes, and ultimately leads to 
increases in State and local spending of own-source revenues.
    The States with the largest amounts of taxes-paid 
deductions currently spend $2,800 more per capita on average 
than States with lower amounts of those deductions. The taxes-
paid deduction not only benefits higher-income individuals, but 
it also tends to benefit the wealthiest States. The wealthiest 
States, such as New York, New Jersey, Connecticut, 
Massachusetts, and Virginia, all have among the highest 
percentages of filers claiming the State tax deduction. 
Meanwhile the poorest States, such as Arkansas, Mississippi, 
New Mexico, West Virginia, all have among the lowest and fewest 
percentage of filers claiming the deduction. Is it fair to have 
a tax deduction that gives the biggest benefit to the 
wealthiest States?
    As far as individuals, I think we all know that those 
claiming the taxes-paid deduction, 88 percent of the benefits 
of that deduction go to taxpayers earning over $100,000 a year. 
Does that seem fair?
    Now let's turn to the debt question. In recent years local 
governments have taken on an enormous amount of new debt, which 
now does not seem to be financing a lot of new investment. In 
fact, since year 2000, State and local debt has increased by 
152 percent, increasing from roughly $1.2 trillion to nearly $3 
trillion, and meanwhile State and local investment has grown 
hardly at all after adjusting for inflation.
    So we have to ask ourselves, where has all of that borrowed 
money gone? The municipal bond exemption may not be the sole 
cause of all that new borrowing, but the availability of this 
cheap source of financing does create a moral hazard that can 
only be cured by eliminating the exemption.
    Now the question is what would be the economic effects of 
eliminating the taxes-paid deduction and the municipal bond 
exemption? We used the Tax Foundation's tax simulation and 
macroeconomic model to answer this question in two different 
ways. We ran two scenarios. In the first scenario we eliminated 
the taxes-paid deduction and used all of the increased revenues 
for deficit reduction. The model showed that this sort of 
revenue-raising plan would reduce the long-term level of GDP by 
0.23 percent, it would reduce private business stocks by 0.45 
percent, and it would reduce wages slightly.
    Now, these are not major economic effects, I understand, 
but this sort of policy would reduce GDP by $1 for every $1 of 
tax revenues it would raise, and we have to question whether 
that is worth the trade-off.
    Now, in the second scenario we modeled a revenue-neutral 
plan that eliminated the taxes-paid and the municipal bond 
exemption going forward, while lowering tax rates across the 
board, and we found that it had a very positive impact on the 
economy. It would boost future level of GDP by .26 percent, or 
about $41 billion, not a huge effect admittedly, but it would 
boost private business investment and wages as well, and enough 
to create about 240,000 new jobs.
    While, in conclusion, Mr. Chairman, I applaud the committee 
for taking on this very challenging effort of reforming the Tax 
Code, I think we all know that the defenders of these kinds of 
provisions will put enormous pressure on Members of Congress to 
save them from reform, as was done successfully in 1986. 
However, the economic evidence is very clear that these 
provisions produce more harmful effects than benefits. They 
encourage higher taxes, higher spending, and more debt at the 
State and local level. And our simulation showed that 
eliminating these provisions while lowering tax rates across 
the board would lead to higher GDP, higher private investment, 
higher wages, and better living standards for all Americans.
    I appreciate this opportunity, and I welcome any questions 
you might have.
    Chairman CAMP. Well, thank you very much, Mr. Hodge.
    [The prepared statement of Mr. Hodge follows:]

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

STATEMENT OF DAVID PARKHURST, DIRECTOR OF ECONOMIC DEVELOPMENT 
 AND COMMERCE COMMITTEE, OFFICE OF FEDERAL RELATIONS, NATIONAL 
             GOVERNORS ASSOCIATION, WASHINGTON, DC

    Chairman CAMP. Mr. Parkhurst, you are recognized for 5 
minutes.
    Mr. PARKHURST. Chairman Camp, Ranking Member Levin, and 
Members of the Committee, thank you for inviting testimony from 
the National Governors Association, which is the only 
bipartisan organization of the Nation's Governors. My name is 
David Parkhurst, and I direct NGA's economic development and 
commerce committee, led by Pennsylvania Governor Tom Corbett 
and Kentucky Governor Steve Beshear.
    Governors last year appointed a five-member tax reform task 
force, cochaired by Governors Corbett and Beshear, to explore 
the possible effects of Federal tax reforms on the States. 
Other members of the task force included Connecticut Governor 
Malloy, Michigan Governor Snyder, and U.S. Virgin Islands 
Governor de Jongh.
    Let me begin with a few main points. Number one, Federal 
and State tax policies are intertwined and linked; two, the 
preservation of public financing, notably tax-exempt bonds, is 
necessary because it is the primary method for States and local 
governments to raise capital for a wide range of infrastructure 
projects; three, Federal laws and regulations should not 
increase costs States and local governments incur to issue 
municipal debt or decrease investor appetite to purchase those 
products; and number four, no Federal law or regulation should 
preempt, limit, or interfere with the constitutional or 
statutory rights of States and local governments to develop and 
operate their revenue and tax streams.
    Tax reform is a complex and multipronged issue. Changes to 
deductions, credits, exclusions, and exemptions in the Federal 
code will have corresponding revenue and economic implications 
for the States because of the variations in each State's 
linkages to the Federal code.
    In anticipation of comprehensive Federal reform, the 
Nation's Governors recently released guiding principles. They 
focus on Federal deductibility of State and local taxes and the 
interest exclusion on municipal bonds, because these topics are 
top priorities for all States. In addition, the principles 
address the broader issues of ensuring that Federal reform does 
not limit or preempt State authority over budget and revenue 
systems.
    I want to highlight one point I think captures an important 
reminder. Federal tax policies and tax expenditures serve 
public policy purposes that aren't necessarily captured in 
revenue and spending numbers. To help avoid unintended 
consequences from Federal reform, Federal and State partners 
should work together to determine whether the policy benefits 
of a particular Federal tax expenditure exceeds its budgetary 
costs before making final decisions.
    For nearly 200 years municipal bonds have assisted States, 
cities, and counties finance their infrastructure projects. 
Since its inception at the beginning of the 20th century, the 
Federal code included the exclusion from income for municipal 
bond interest. This was intentional and not a special-interest 
add-on.
    Ending or capping this Federal exclusion would increase the 
cost of financing infrastructure. Investors would demand higher 
yields as compensation. Higher borrowing costs would chill 
infrastructure investments, lead to higher taxes on citizens to 
cover those increased costs, or some combination. Given 
constraints on direct Federal spending, and with the tremendous 
overhang of unmet infrastructure needs throughout the country, 
policymakers should encourage, not limit, State and local 
financing for those projects that create jobs and boost 
economic growth.
    Finally, every State and local government has some 
combination of mandatory income, sales or property tax. Each of 
those combinations benefits directly or indirectly from the 
Federal deductibility that has long been in place. Ending this 
Federal tax deduction for State and local income and property 
taxes changes the rules. It would effectively mean marginal tax 
rates increase for taxpayers, and, absent an offset for equity 
purposes, it could create an economic drag and increase 
uncertainty and risk for bondholders.
    The message to Congress from the Nation's Governors is 
clear: We are all in this together. States and local 
governments, as the principal owners and operators of our 
Nation's infrastructure and issuers of municipal bonds, will 
remain strong advocates for safeguarding municipal markets and 
supporting investment in infrastructure.
    As Congress moves forward on comprehensive tax reform, NGA 
looks forward to working in partnership with this committee. 
Thank you.
    Chairman CAMP. Thank you very much, Mr. Parkhurst.
    [The prepared statement of Mr. Parkhurst follows:]
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  STATEMENT OF CHRISTOPHER TAYLOR, FORMER EXECUTIVE DIRECTOR, 
     MUNICIPAL SECURITIES RULEMAKING BOARD, WASHINGTON, DC

    Chairman CAMP. Mr. Taylor, you are recognized for 5 
minutes.
    Mr. TAYLOR. Thank you, Mr. Chairman, Ranking Member Levin. 
I am here to share my observations on the municipal debt market 
as an economist and as a regulator of the municipal dealer 
community from 1978 to 2007. In particular I want to focus my 
remarks both in my statement and in my opening remarks on the 
Tax Reform Act of 1986, which fundamentally changed the 
municipal securities market and did so overnight.
    That act basically changed the groups that invested in 
municipal debt, and it did so in a way that destroyed the 
business models of many of the members of the municipal dealer 
community. It changed the structure of the market, and it 
changed the way in which those participants in the market 
adapted to the new tax law. It moved the dealer community away 
from a model of risk taking to one that was focused on 
obtaining fees for services. That led to a series of scandals 
and problems that the municipal market has wrestled with for 
nearly 20 years.
    Up to date, in the early 1990s, the municipal market paid 
more than $250 million--the dealer community paid more than 
$250 million in fines for yield burning that dealt with the 
reinvestment of bond proceeds for municipal bonds. For Members 
of the Committee, if you make a bond tax exempt for income tax 
purposes, the rate at which State and local governments borrow 
is less than what corporations borrow because of the tax 
exemption. This gives State and local governments and those 
that serve them, the dealer community and others, the chance to 
invest those monies at a higher taxable rate. IRS rules 
regulate that, and IRS rules were changed as a result and 
tightened supposedly as a result of the tax reform effort of 
1986.
    Despite that, and because of the changes in the market, we 
ended up with two sets of scandals and major rule changes that 
had to be enacted by the Municipal Securities Rulemaking Board 
to address problems in the market. The two scandals involved 
the reinvestment of bond proceeds, yield burning, as I 
mentioned; fines of about $250 million; and, ongoing today, an 
SEC, IRS, and Justice Department investigation which has led to 
the 13 individuals either pleading guilty or being found guilty 
of violating Federal tax and securities laws. Moreover, in the 
most recent one to date, the fines have reached the point of 
$650 billion on the part of the dealer community.
    It raises the question about tax law changes; because tax 
law changes change markets, participants change their behavior. 
So whatever you do, please keep in mind how it is going to 
affect the markets and those that are participants in the 
market, be it State and local governments, the dealer community 
or investors. Those changes can have a dark side. So I would 
urge all of you to think very carefully about how you go about 
doing that so that these markets are not fatally damaged.
    We do have one of the greatest sets of infrastructure in 
this country. In my role as the regulator of the municipal 
securities market, I had individuals come to my office on a 
regular basis from foreign countries, and their constant 
question is, how did you build all these roads, schools, 
buildings, and everything else? And most of it came out of the 
municipal securities market. So please look at that market from 
a point of view of maintaining its integrity and taking steps 
to maintain its integrity if at all possible.
    With that, I will conclude my remarks, Mr. Chairman.
    Chairman CAMP. Thank you very much, Mr. Taylor.
    [The prepared statement of Mr. Taylor follows:]
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    STATEMENT OF JOHN BUCKLEY, PROFESSOR OF LAW, GEORGETOWN 
   UNIVERSITY LAW SCHOOL GRADUATE TAX PROGRAM, WASHINGTON, DC

    Chairman CAMP. Mr. Buckley, you are recognized for 5 
minutes.
    Mr. BUCKLEY. Thank you, Mr. Chairman and Ranking Member 
Levin, for the opportunity to participate in your hearing 
today.
    After completion of your hearings and working group 
process, this committee faces a fundamental choice as to the 
structure of the tax reform that it will pursue. Mr. Chairman, 
you, the work you and your staff have done outlining areas of 
the code that need structural reform and proposing options for 
changes in those areas, does offer one way forward. If you put 
your committee staff and the joint committee staff back to 
work, you could identify several other similar-type areas. 
Those areas plus the ones you have already done could be the 
basis for a fundamental tax reform, a reform that could pass 
this committee, in my opinion, with bipartisan support, and a 
reform that would compare favorably to the 1986 tax reform. So 
that is one way forward.
    The other way is to pursue a plan with dramatic rate 
reductions and equally dramatic repeals or curtailments of 
existing tax benefits. That will be a very challenging task for 
this committee for several reasons. First, you, unlike 
everybody else in this tax reform debate, have to provide the 
details, something that almost everybody has avoided up to this 
point.
    Second, in 1986, the Congress had the luxury of being able 
to eliminate rampant, abusive tax sheltering to finance the 
rate reductions. That does not appear to be present in today's 
situation. So to finance rate reductions today, you will have 
to go where the Congress was totally unwilling to go in 1986, 
and that is repeal or curtailment of long-standing tax benefits 
that are embedded in our society and in our economy. There are 
no tax benefits more long-standing than the exemption for 
interest on State and local bonds and the deduction for State 
and local taxes.
    I think the best way to explain the benefits of State and 
local bonds is to simply look at how they have been used. Most 
tax-exempt bonds are borrowing for public infrastructure. 
Private activity bonds, where there is a private business use, 
are a relatively small part of the market. In the past decade 
tax-exempt bonds have financed $1.65 trillion of new 
infrastructure investment with very small cost to the Federal 
Government. A third of that infrastructure investment was 
primary and secondary school construction.
    Repealing the exclusion will simply increase the cost of 
capital for State and local governments, reducing investments 
in infrastructure. It is that simple. To pretend that there are 
benefits from reduction in infrastructure spending, I think, is 
just demonstrably wrong. We have underinvested in our public 
infrastructure, and there are observable economic costs on 
account of that underinvestment. Tax reform should not make 
that problem worse.
    You also should recognize the impact of tax reform on State 
and local governments. Repealing the deduction for State and 
local taxes will increase the burden of those taxes and make it 
more difficult for State and local governments to finance basic 
governmental services.
    In the case of the deduction for real property taxes, I 
think the committee also has to be concerned about the impact 
of collateral consequences. Most people believe that the value 
of the mortgage interest deduction and the value of the 
deduction for State and local real property taxes is embedded 
in the price of our homes. Repealing those benefits could put 
further pressure on home values. Studies have indicated it will 
lead to further real declines in home values, threatening our 
already too-slow economic recovery.
    Mr. Chairman, these issues were debated at great length in 
the process of formulating the 1986 Tax Reform Act. Substantial 
changes to these benefits were rejected in 1986, and I believe 
the reasons for that rejection remain valid today.
    Thank you very much.
    Chairman CAMP. Thank you very much, Mr. Buckley.
    [The prepared statement of Mr. Buckley follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman CAMP. And now we will go to questions.
    Mr. Hodge, you stated that eliminating the Federal tax 
breaks for State and local taxes and bonds, and using that 
revenue to reduce rates across the board, would actually create 
nearly a quarter of a million jobs in America. Given the 
stubbornly high levels of unemployment that we have seen and we 
continue to face several years after the financial crisis, 
could you explain for the committee the economics behind why 
that trade-off would result in significant job gains?
    Mr. HODGE. Sure. Well, what this sort of reform would do--
and this is revenue-neutral reform in which the proceeds from 
eliminating those deductions would go directly toward across-
the-board rate reductions, and in our model it would allow all 
rates to be reduced by about 5 percent--not 5 percent points, 
but 5 percent. But that is enough to spur a lot of new economic 
activity either through direct spending on the part of 
taxpayers or through new investment, and by lowering the cost 
of capital, we would see a considerable amount of new 
investment in the economy, which ultimately leads to increased 
wages and increased jobs. These sorts of effects don't happen 
overnight, but they do happen over time, and I think that is 
the critical point is to look at the long-term horizon of what 
the economy will look like once the reform is fully in place 
and fully working its way through the economy.
    Chairman CAMP. Also, I mentioned in my opening statement 
that three States are responsible for more than a third, almost 
40 percent, of the total Federal deduction for State and local 
taxes, and they coincidentally happen to be the three States 
that also have the highest combined State and local income tax 
rates in the country. Does the State and local tax deduction, 
as some economists have claimed, does that really encourage 
bigger government at the State level, in your opinion?
    Mr. HODGE. The research is pretty clear that there is a 
direct linkage between the State and local tax deduction and 
higher taxes, certain types of taxes at the State level, 
particularly those that are deductible, those being progressive 
income taxes and property taxes, and a number of States have, 
as you indicate, have dramatically increased those particular 
types of taxes. California has the highest State income tax, 
personal income tax. New York has some of the highest property 
taxes in the Nation.
    And so those are the kind of taxes that are not only 
deductible, but then are more easily increased by State and 
local officials because they know that Washington is going to 
pick up as much as one-third of the tab through the State and 
local deduction.
    Chairman CAMP. All right. I have a question for everyone on 
the panel, if you could answer briefly. Do you believe--and I 
will start with you, Mr. Hodge. Do you believe there is a 
policy difference between the Federal subsidies for government 
bonds, which obviously are used for a public purpose, and 
private activity bonds, which benefit private parties?
    Mr. HODGE. I would eliminate both, Mr. Chairman. I don't 
think it is the proper role of the Federal Government to 
subsidize either one of those. Essentially what those policies 
are doing is saying that it is more important to build a sports 
stadium or some other public infrastructure than to build a 
private R&D facility, and I think that the Tax Code should be 
neutral to those kinds of decisions.
    Chairman CAMP. All right. Mr. Parkhurst.
    Mr. PARKHURST. Mr. Chairman, the vast majority of tax-
exempt bonds, whether they are, in this case, private activity 
bonds where you have a public wrap, or it is a clear tax-exempt 
bond issued by State and local is usually used for financing 
traditional purposes, it is helping with government, schools, 
roads, sewer systems, public power, airports, and other 
infrastructure.
    It is interesting. I would say that some of the examples we 
have seen recently in the media, were addressing projects 
financed under special temporary authorities that were granted 
by Congress following natural disasters and other events like 
Hurricane Katrina or 9/11, and the authority for those bonds 
has largely expired. And I think that private activity bonds 
really do help focus in some areas around low-income housing 
and do help in certain particular areas.
    Chairman CAMP. All right. Mr. Taylor.
    Mr. TAYLOR. I believe that----
    Chairman CAMP. Your microphone.
    Mr. TAYLOR. I certainly believe that if you are going to 
give a benefit--and that is a decision the committee has to 
make--if you are going to give a benefit to the State and local 
government sector, limit it to true public purposes. I do not 
see a reason to--for the same reasons that I have heard to my 
right--see any reason to give any kind of public benefit to 
private corporations or private decisionmakers. I would 
probably go very strongly in favor of very sharply limiting 
even the public purposes that are out there.
    Mr. Parkhurst mentioned airports and public power. I am not 
sure, quite frankly, that you could have a good reason for 
doing either of those as a true public purpose. Limit it to 
roads, sewers, and those things that local governments and 
State governments do, not stuff that can be substituted by a 
private corporation.
    Chairman CAMP. All right.
    Mr. Buckley.
    Mr. BUCKLEY. Well, first of all, I would say that most tax-
exempt bonds are general obligation, traditional government 
financing of infrastructure. The term ``private activity bond'' 
picks up a whole wide range of activities, some of which I 
think have big public benefit: docks, wharves, airports. These 
are transportation facilities that are necessary for our 
economy, there are public purposes involved, and therefore I 
think it is appropriate to have private activity bond financing 
for that type of thing.
    But if this committee is going to look at anything in this 
area, I would suggest they would look at the private activity 
bond rules. But let me firmly agree with the prior statement: 
The abuses that were outlined in that New York Times article 
are largely because of one-time disaster-related relief, and I 
would hope the Congress would not repeat that in the future.
    Chairman CAMP. Well, the New York Times article talked 
about the winery in North Carolina, the golf resort in Puerto 
Rico, the Corvette museum in Kentucky, obviously the Barclay 
Center in Brooklyn, as well as the Goldman Sachs and Bank of 
America towers or buildings in New York City. But my question 
is if those aren't appropriate for federally subsidized 
borrowing, are there any rules that we might change to help 
prevent those activities? You sort of touched on that, Mr. 
Buckley.
    Just quickly if you each want to respond if you think there 
is any--I mean, obviously some have said prevent that activity 
altogether, and narrowly focus. Any other comments, Mr. 
Parkhurst or Mr. Taylor?
    Mr. PARKHURST. I would associate my remarks with Mr. 
Buckley. I think that that is an opportunity to obviously 
correct anomalies, to look very carefully at how private 
activity bonds are used, and make certain that the private 
portion is a de minimis amount, and that indeed private 
activity bonds are used for a public purpose.
    I think we have had this discussion over the years around 
the use of eminent domain, and the Court had been very clear in 
how that issue was resolved. While State and locals may have 
won in the court, the court of public opinion, I think, led to 
some further discussion on the issue. I think we will have a 
similar discussion going forward with private activity bonds.
    Chairman CAMP. Mr. Taylor.
    Mr. TAYLOR. Mr. Chairman, if you are going to confer a 
subsidy or a benefit or something to a State and local 
government, they should be actively involved and the only ones 
involved in that activity in terms of either using their taxing 
power, general obligations, raising sewer fees, whatever it is. 
But the minute you allow a melding of those things, then I 
think you open the door to potential abuses both in terms of 
the amount of issuance that is out there and also about how the 
funds are subsequently used and invested.
    Chairman CAMP. Okay. All right. Thank you.
    Mr. Levin is recognized.
    Mr. LEVIN. Thank you.
    You know, I agree we should look at private activity bonds, 
remembering they are a small portion of the bonding that is 
going on, and I would hope, though it isn't clear within the 
jurisdiction of which of the working groups, Mr. Chairman. I 
would hope that the working groups----
    Chairman CAMP. This working group.
    Mr. LEVIN. Well, but also I think we need--I think the 
testimony today shows the need for much further inquiry into 
this issue, because, Mr. Hodge, I very much agree at least with 
what you say at the beginning. I don't agree with other parts 
of it perhaps. But when you say, contrary to conventional 
wisdom, not every tax expenditure is a loophole, that is really 
correct. And I think in this discussion of tax reform we need 
to press people when they say, let's resolve these huge gaps by 
looking at loopholes, we need to press them what they mean by 
that, because I think the issues before us today are not 
loopholes. There are loopholes, but these are policies that 
have been embedded in our Tax Code for a long time.
    By the way, Mr. Hodge, the Tax Foundation is a nonpartisan 
entity. How is it financed?
    Mr. HODGE. We are entirely privately financed. We are a 
nonprofit. We are a loophole for people who want to avoid 
taxation by giving us a charitable contribution, and if I----
    Mr. LEVIN. But the funders aren't public, right?
    Mr. HODGE. I am sorry?
    Mr. LEVIN. The funders to your foundation aren't public?
    Mr. HODGE. They are private individuals. We accept no 
government funds.
    Mr. LEVIN. And it comes from individuals, corporations?
    Mr. HODGE. Private foundations.
    Mr. LEVIN. Private foundations. Okay.
    Mr. Parkhurst, your testimony was approved by the 
association?
    Mr. PARKHURST. Yes, Congressman.
    Mr. LEVIN. So you are speaking on behalf of all the 
Governors, Republicans, Democrats?
    Mr. PARKHURST. NGA is a bipartisan organization of the 
Nation's Governors, correct.
    Mr. LEVIN. And when you testify, there is some clearance 
process, so when you speak on behalf of Governors, it is 
something that is appropriately said?
    Mr. PARKHURST. Yes, there is.
    Mr. LEVIN. Because I think that is important. There is a 
pointing here to three States that receive a substantial 
portion of the impact of the deduction for State and local 
taxes. I think when we look at that, we should look at the rest 
of the States. I think also we should look at what those three 
States do in terms of the use of their monies, and to simply 
say they are higher-tax States, I think we also need to look at 
their educational processes, their role in health care in this 
country as well as their State.
    And, Mr. Buckley, I also think we need to take into account 
what is outlined in your testimony about the impact of long-
term bonds. By the way, we tried to keep the other bonding 
program alive, and it now isn't in existence. The pages aren't 
numbered, but you indicate $340 billion of annual issuance. It 
goes this way according to estimates: $1.65 trillion in new 
infrastructure investments over the last 10 years in terms of 
school construction accounted for almost a third of the 
infrastructure investments. The other major categories were 
$288 billion in tax-exempt financing for acute care hospitals, 
$258 billion for water and sewer improvements, and $178 billion 
for roads, and $100 billion for mass transit.
    Mr. BUCKLEY. Yes, Mr. Levin, and let me go back to the 
discussion of the three big States, because I think the 
discussion is somewhat unfair to the three big States. They are 
large States; they are urban States. Urban areas have higher 
costs than rural areas. So it is unclear in my mind whether 
they have high tax rates because of the Federal deduction, or 
because it is much more expensive to have government in the 
area of an urban area.
    They are also high-income States, so clearly the tax rates 
have--the State and local taxes are being invested for reasons 
that have created wealth in those States. I think--and they are 
among the largest populated States.
    So there are whole reasons of factors why some States have 
higher tax burdens that have nothing to do with Federal 
deductibility. They have to do with some of the choices they 
have made about their educational system that have proved to be 
valuable to their citizens and because of the urban nature of 
the States.
    Mr. LEVIN. Thank you.
    Chairman CAMP. Thank you.
    Mr. Johnson is recognized for 5 minutes.
    Mr. JOHNSON. Thank you, Mr. Chairman.
    Mr. Hodge, last week the Dallas City Council came in to see 
me, and in that meeting they expressed strong opposition to 
doing away with the tax exemption for municipal bonds, which 
you referred to. According to the city's position paper, and I 
quote, Removing the tax exemption from municipal bonds could 
raise the city's borrowing costs substantially. The increased 
borrowing costs would disproportionately impact moderate- and 
low-income residents since higher borrowing costs for the city 
would mean either doing less or raising property tax or water 
and sewer fees to cover higher borrowing costs.
    In your testimony you make the case for doing away with the 
tax exemption, and I am going to ask you about four questions 
if you would talk to them. In the interest of ensuring a full 
and fair debate, how would you respond to the council's 
concerns, one? And, two, is the council crying wolf? Three, 
would borrowing costs actually increase substantially? And, 
four, would property taxes have to go up?
    Mr. HODGE. Well, and not necessarily in that order, to some 
degree, yes, they are crying wolf. They are enjoying a benefit, 
that is absolutely clear.
    To the extent of how much interest rates would go up, well, 
that is up to the marketplace and how creditworthy that 
particular government is. But I think there should be parity 
between what that government borrows at and what a private-
sector company in the same community would have to borrow at. 
Whether.
    Or not it would lead to a direct increase in property taxes 
and other taxes to pay for it, it depends. It actually might 
encourage the city to reduce its overall amount of borrowing 
and be a little bit more prudent in what it goes about trying 
to build.
    I think, more importantly, if you look at the overall 
issue, this is a very inefficient way of funding municipal 
projects because about a third of the benefit will go to 
bondholders, many of them who are upper income, and then a 
third of the benefit, yes, does go to the community. But when 
you are a Federal official looking at this, you are going, 
wait, we are paying a third extra essentially to finance this 
particular local project. So it is a very inefficient way to do 
it.
    Actually, I wouldn't recommend this, it would be cheaper in 
a way to just give the cash to a State community or to a local 
community to build a project rather than giving a third to the 
bondholder and a third to the community.
    Mr. JOHNSON. In that case New York would probably want 
more.
    Mr. HODGE. It would certainly want more, yes.
    Mr. JOHNSON. Thank you so much.
    Thank you, Mr. Chairman.
    Chairman CAMP. Thank you.
    Mr. Rangel is recognized.
    Mr. RANGEL. Thank you so much.
    Very interesting, Mr. Hodge, your response to Mr. Levin in 
terms of your organization receiving tax exemption. I 
understand that from your testimony you believe that if we 
eliminate the subsidies given to local and State governments, 
we can take that money and lower the rates for taxpayers. And I 
assume that the contributors to your firm are wealthy 
taxpayers. I mean, it is not poor people that are doing it, 
right?
    Mr. HODGE. I don't know the net wealth of my----
    Mr. RANGEL. No, you know your constituency.
    Mr. HODGE. We have everything from little old ladies--we 
have contributors who are little old ladies and wealthy people.
    Mr. RANGEL. Well, let me ask you, do you engage in 
fundraising?
    Mr. HODGE. We do indeed.
    Mr. RANGEL. And you have no clue as to who makes the 
contribution to your----
    Mr. HODGE. We do, yes, certainly.
    Mr. RANGEL. Are they wealthy people?
    Mr. HODGE. There are some, and then there are some who 
aren't.
    Mr. RANGEL. Okay. But the whole idea is that you really 
want to lower tax rates as opposed to assisting States, 
especially the three that you mentioned, you think that is a 
give-away.
    I ask you this: Do you have any idea as to the amount of 
Federal taxes that are paid to the Federal Government from 
these three States and how it relates to States that are less--
have less income? Do you ever take a look at it?
    Mr. HODGE. We do. We annually rank the States in terms----
    Mr. RANGEL. And it is the highest in the country, isn't it?
    Mr. HODGE. It is because of the progressive nature----
    Mr. RANGEL. It is the highest amount of revenue in the 
country.
    Mr. HODGE. Right.
    Mr. RANGEL. Now, if an argument was made that because God 
has blessed these States with resources, and that they want to 
improve their education and their infrastructure and to be a 
place that is a symbol for American capitalism in this country 
and the world, just say like New York as an example, if we have 
to pay heavily for that in order to increase the revenue to 
turn back over to our Federal Government that makes it 
possible, don't you really believe that we should get a break 
for the contribution that we make to society and to your tax-
exempt foundation?
    Mr. HODGE. I think that people like Donald Trump and others 
on Wall Street can well afford----
    Mr. RANGEL. I wish you wouldn't have mentioned Trump's 
name. He is not relevant, he really isn't, to this discussion.
    Mr. HODGE. He doesn't----
    Mr. RANGEL. Please don't do that.
    Mr. HODGE. Wealthy people don't need that kind of subsidy.
    Mr. RANGEL. Okay. Well, I really would want you to think 
about whether you would want the lowest States that have the 
lowest educational areas, the lowest-paid people, the less 
productive thing, if you are comparing this as an example for 
fairness, do you think that makes any sense at all that you 
should compare the lowest States? Now, true, they need 
revenues, but that you compare them with a higher-paying tax 
State that has higher expenses than the rest? You don't believe 
in equality of the 50 States across the board between those 
that contribute to the Federal Government and those that are 
the beneficiaries of the Federal Government. Isn't there a 
difference that has to be considered?
    Mr. HODGE. The economic research shows that all of those 
citizens would be better off with lower rates.
    Mr. RANGEL. But isn't it true that we contribute----
    Mr. HODGE. Lower tax rates.
    Mr. RANGEL. A large amount of States that you mention in 
your testimony, they are not givers, they are receivers, and a 
lot of the part of that money comes from California and New 
York; isn't that true?
    Mr. HODGE. There is a considerable amount of 
redistribution.
    Mr. RANGEL. A lot of money comes from the high-tax States, 
and it goes to the lower-income States, and that is a fact. So 
when we ask you to consider that, then you should include that 
in your testimony that we are big givers, and we don't complain 
about it. They complain to me, but they don't complain to the 
Federal Government. We are so pleased that our State is able to 
do it with the support of our partners.
    That is what Sandy Hurricane was all about. When one of the 
States get into trouble, we don't see who is a poor State and 
who is a rich State, we come in. So for you to single out these 
three States because we tried to be partners with them in 
rebuilding, when they rebuild for the city, when they rebuild 
for the State, I would like to believe that they are rebuilding 
for our great country as well.
    Thank you, I yield back the balance of my time.
    Chairman CAMP. Thank you very much.
    Mr. Reichert is recognized.
    Mr. REICHERT. Thank you, Mr. Chairman.
    So I want to focus on Washington State now. Mr. Hodge, you 
talked about a couple of study models that you looked at in 
your testimony, and that those studies that you did suggested 
that by eliminating the itemized deductions for State and local 
taxes, that would result in a lowering of tax rates; is that 
correct?
    Mr. HODGE. That is correct.
    Mr. REICHERT. In your study models did you look at those 
States--and there are just a handful, Texas is one of those 
from Mr. Johnson's neck of the woods----
    Mr. HODGE. Sure.
    Mr. REICHERT [continuing]. Did you look at the sales tax 
States? We don't have an income tax in the State of Washington. 
We have approximately a 9 percent sales tax. What would happen 
there?
    Mr. HODGE. Well, we didn't look at every State specifically 
in terms of how it would change the mix of their tax base or 
their economy overall. We were looking at the national results. 
But generally speaking, the citizens of Washington State 
probably have far fewer State and local tax deductions than 
would be the citizens of other States because of the mix of 
your taxes. While you do have, certainly by some counts, some 
higher property taxes, you don't have a personal income tax nor 
a corporate income tax. You have the B&O tax, and some of that 
I don't think is deductible.
    So to some extent the citizens, the taxpayers in your State 
would be far better off by giving up the deduction and taking 
lower Federal income tax rates, and they would be far better 
off as a result, I think.
    Mr. REICHERT. You don't have an opinion as to whether or 
not the sales tax might be reduced, the State might move that 
direction or----
    Mr. HODGE. Well, since it is not--well, it is deductible to 
some degree, but not like the personal income tax. I don't 
think that the State would necessarily reduce it. We would 
have--I would have to give that some more thought.
    Mr. REICHERT. And this is for the panel, last question, Mr. 
Chairman. Do any of you see a policy reason for doing tax 
reform and not providing parity for State sales and income 
taxes, whether it be providing continued permanent deduction 
for both or eliminating both?
    Mr. BUCKLEY. I believe there should be neutrality among the 
States--regardless of their choice of revenue sources, and that 
has been the underlying principle of the State and local tax 
deduction. It was violated somewhat in 1986 when they repealed 
the deduction for State and local retail sales taxes, but it 
was replaced, restored, and so I think the principle of 
neutrality among States is one that should be followed in this 
area.
    Mr. REICHERT. Appreciate that, Mr. Buckley.
    Any other response?
    Mr. PARKHURST. I would agree with the principle of 
neutrality, Congressman. Also one of the principles that the 
Governors have laid out is one of sovereignty. I think the 
discussion I have heard so far is a question that really rests 
at State capitols and between the executive and legislative 
branches of the States to make those decisions on the balance, 
if you will, of their respective State strategies on taxes, to 
create a competitive environment.
    Mr. REICHERT. Okay, thank you. I yield back.
    Chairman CAMP. Thank you.
    Mr. Neal is recognized.
    Mr. NEAL. Thank you, Mr. Chairman.
    I think I provide a unique perspective, because I think Mr. 
Pascrell and I might be the only two on this side who were 
formerly mayors of major municipalities, and I can tell you 
that tax-exempt municipal bonds are the most important tool in 
the United States for financing investments in schools, roads, 
bridges, water, and sewer systems. The reality is that these 
initiatives just wouldn't happen without muni bonds.
    Bowles-Simpson in its 2010 deficit reduction 
recommendations proposed full taxation for State and local 
interests for all newly issued bonds. A recent report shows 
that if this proposal had been in place during the 2003 to 2012 
period, it is estimated that $1.65 trillion of State and local 
infrastructure would have cost governments an additional $495 
billion of interest expense. For Boston, the tax exemption loss 
over that period would have resulted in a $55 million cost 
increase. These numbers are staggering, and the reality is that 
State and local governments can't withstand those additional 
costs.
    John, in our zeal to do tax reform here, which we all agree 
upon, there apparently are many options that we could consider 
to raise revenue. You and I have worked over the years on a 
number of proposals to close tax loopholes, and what do you 
think of eliminating or capping tax-exempt financing as it 
relates to good policy?
    Mr. BUCKLEY. I think you can pretend that there are 
economic benefits from capping or repealing the exclusion only 
if you believe this country will benefit by lower investment in 
public infrastructure. The exemption goes directly to the cost 
of funds for State and local governments, which you have 
experienced.
    The answer to Mr. Johnson is governments will pay higher 
interest rates. I don't think there is anybody in this room 
will disagree with the proposition that repeal of the exclusion 
will increase interest rates to State and local issuers, 
increasing their cost of investment, reducing public 
infrastructure.
    Mr. NEAL. Mr. Parkhurst.
    Mr. PARKHURST. Congressman, the question is a very 
interesting one. I would argue that capping this benefit, to 
your point, would indeed, I think, raise the cost by simply a 
percentage. I think we have seen estimates anywhere between 60 
to upwards of 200 basis points. But interestingly, if the 
purpose of cap is to, you know, address revenue issues, it may 
be a challenge, given that, based on IRS data for 2010, 
itemizing taxpayers seem to fall primarily, who claim interest 
on muni bonds, are making less than $250,000, and I think going 
forward, if the cap is applied in particular to all taxpayers, 
you going to be effectively taxed twice.
    As Professor Buckley says, obviously, going to taxed on the 
increased cost to infrastructure and we will see the direct tax 
here that you are referencing.
    Mr. NEAL. Let me turn for a moment to Build America Bonds. 
John Buckley and I, along with Alan Krueger, worked very hard 
on Build America Bonds. They were part of the 2009 stimulus 
legislation. BABs are taxable bonds for which the U.S. Treasury 
Department pays a 35 percent subsidy to the issuer to offset 
borrowing cost. They were a huge success around the country. 
Virtually everybody who had an airport expansion, they were 
done with Build America Bonds during that period of time. And I 
must tell you that the Accelerated Bridge Program was very 
successful, and across Massachusetts the Build America Bonds 
were a smash.
    Now, I want to ask you, John, do you think that this would 
have happened without Build America Bonds?
    Mr. BUCKLEY. Build America Bonds were enacted at a time 
when the municipal bond market was in freefall. There was no 
market for tax-exempt bonds because of the economic downturn, 
so clearly it responded to a tremendous need at that time.
    I also think it is the response to the argument that the 
exclusion is inefficient. You can dramatically lower the rate 
of the subsidy that was provided in Build America Bonds and 
still dramatically increase the efficiency of the market for 
tax-exempt bonds. So I think it is something that has to be 
looked at in the long run because State and local issuers are 
facing a shrinking market for tax-exempt bonds.
    Mr. NEAL. And New Markets Tax Credits were designed to 
stimulate investment in low-income communities. It has been 
overlooked by conventional capital markets, and it has 
generated more than $45 billion in capital for projects in low-
income communities. In North Hampton, the Holyoke Public 
Library, the Colonial Theater in Pittsfield, cities across the 
country have used New Markets Tax Credits to incent certain 
behaviors. I have been a real champion from day one of New 
Markets Tax Credits. Again, very, very successful. And how 
might cities attract private investment into communities with 
high employment and deteriorated property without the use of 
these incentives?
    Could we do that quickly, Mr. Chairman?
    Chairman CAMP. Very quickly, because time has expired.
    Mr. BUCKLEY. I believe that the New Markets Tax Credit and 
the Low Income Housing Tax Credit are important parts of 
encouraging redevelopment in low-income areas. The market does 
not allocate resources to those areas, so if you repeal those, 
you are relying on market allocations and you will see less 
development, less low-income housing as a result.
    Mr. NEAL. Thank you, Mr. Chairman.
    Chairman CAMP. Thank you.
    Dr. Price is recognized.
    Mr. PRICE. Thank you, Mr. Chairman. And I want to thank the 
panelists for their presentation.
    Mr. Hodge, you make the case that the Federal Government 
ought to be agnostic as it relates to deduction for State and 
local taxes, municipal bonds and the like. Can you help me 
understand why, what the rationale was at the beginning for the 
providing for tax exemption for State and local taxes?
    Mr. HODGE. Sure. Well, according to the principles of sound 
tax policy, we shouldn't pay taxes on income that has already 
been taxed by another level of government. The same way we have 
foreign tax credits where companies don't have to pay tax on--
or they get to deduct taxes paid abroad, a similar rationale 
applies here. And I think that that is true. As a tax purist, I 
would say we generally shouldn't have to pay taxes on taxes or 
income that has already been taxed at the local level. However, 
we ought to look also at the economic effects of that kind of 
policy, and in this case, the policy, the unintended 
consequences of this policy are more harmful, I think, in the 
long run and outweigh whatever benefit comes from that.
    Mr. PRICE. Is that because of a difference in rates between 
States, so different citizens are paying different rates and 
therefore they are treated differently? Is that part of your 
rationale?
    Mr. HODGE. Well, generally speaking, and this goes back to 
1913 when the code was originally written, all State taxes were 
deductible, and then over time it has been whittled away in 
various fashion. Today it is further eroded because of the AMT 
and the Pease provisions, which already reduce the value of 
these deductions. So the Congress has already made this policy 
decision to limit these deductions in some fashion. The 
question is, do we take it to the next level and just eliminate 
it for all taxpayers? We already do it for high-income 
taxpayers, and the question is, do we do it for everyone?
    Mr. PRICE. Yeah. Mr. Buckley makes the case, I think, that 
if this exemption were to go away for municipal bonds and the 
like, that it would drive up costs for infrastructure projects 
and the bonds that would then be let and that, therefore, I 
think is the argument, that then taxes would go up for the 
individuals in that municipality to pay for the increased cost 
for the project. That makes some sense to me. Tell me why that 
isn't the case.
    Mr. HODGE. Well, no, it probably is the case because, you 
know, these projects are getting a federal subsidy. So more of 
the costs would fall on local taxpayers, which means that local 
officials would have to be entirely up front with local 
taxpayers about the cost and they couldn't shift part of the 
cost to the Federal Government.
    Mr. PRICE. So the argument is that doing away with the 
exemption then becomes a much more transparent, much more 
honest way of governance.
    Mr. HODGE. Absolutely, and brings more responsibility to 
local officials to maintain those costs and reduce those costs 
and ultimately reduce the long-term borrowing cost to future 
taxpayers, because you got to remember, this is an obligation 
on future taxpayers to pay off those bonds. So by essentially 
subsidizing it at the federal level, you are encouraging more 
and more of that activity at the local level, putting a greater 
burden on future taxpayers, and that is what we have seen in 
the recent data.
    Mr. PRICE. Mr. Parkhurst, why doesn't that make any sense?
    Mr. PARKHURST. I just want to highlight one key point here, 
Congressman. When we are talking about investments in 
infrastructure, we are talking about long-term capital assets 
that have a long lifecycle, so it makes eminent sense to be 
issuing long-term debt for infrastructure that is going to 
benefit----
    Mr. PRICE. I think Mr. Hodge's argument was that the 
process gets more transparent, more accountable, and the 
elected officials become more then responsive to their 
constituents. Why isn't that true?
    Mr. PARKHURST. I would argue that given that for many 
States and municipalities that are issuing debt, many are doing 
it either through a public referendum where they have got to go 
to the voters to explain why they are going to be issuing 
bonds. There are caps that are held. Transparency is well 
addressed, I think, at the municipal level through that at this 
point right now. I am not certain what the delta would be on 
additional transparency from Mr. Hodge's point.
    Mr. PRICE. Mr. Hodge.
    Mr. HODGE. I think that the more we can make this process 
transparent, the better. And if we look at the increase in debt 
over the last, say, 12 years relative to the amount of that 
debt that has gone to new infrastructure, there is a lot of 
money missing. There has been very little new investment in 
infrastructure relative to the tremendous amount of new debt 
that has been taken on.
    Mr. PRICE. All right. Thank you, Mr. Chairman.
    Chairman CAMP. Thank you.
    Mr. Doggett is recognized. After Mr. Doggett concludes, we 
will go two to one on this side.
    Mr. DOGGETT. Thank you, Mr. Chairman.
    There is probably no perfect way to ensure public input, 
public participation for a truly public interest revision of 
our complex tax laws, but I think what the chairman has done in 
terms of laying out proposals for public comment, last year on 
the international tax, recently on derivatives, is a step in 
the right direction, as is this hearing. I am less confident 
about how productive in assuring the public interest is 
represented in this revision, how the working groups are 
operating. In fact, one of them is meeting as we convene here 
now with groups that are interested in what is happening in the 
energy code, and many of these working groups are overlapping. 
All of them are done in private. And they do provide some 
insight, but they do not really provide an opportunity for all 
Members of the Committee to participate in all of these really 
important groups. And so I think that process is not quite as 
productive, and the more hearings like this we can have to 
explore all the implications of Tax Code revision, I think the 
better product we will get.
    You have covered a lot of territory about how we finance 
infrastructure. I would like to return to a topic that the 
chairman asked you about, and that is on private activity 
bonds. While I realize that is a small portion of the overall 
municipal or bond market, the suggestion in the recent Times 
critique of the private activity bond market referred to a 
Bipartisan Policy Center study suggesting that the private 
activity bond market amounts to a cost to the Treasury of $50 
billion over 10 years. Is that a fair analysis of what the cost 
of that program is?
    Mr. BUCKLEY. Let me say that their estimate makes the point 
that I was trying to make in my testimony, that it is an 
extremely small piece of the overall cost of tax-exempt bonds.
    Mr. DOGGETT. Indeed, and I agree, but $50 billion is $50 
billion.
    Mr. BUCKLEY. Right. Now, also, the term private activity 
bond picks up a whole wide range of activities. Bonds issued on 
behalf of private colleges are private activity bonds. Bonds 
issued for transportation infrastructure, wharves, docks, 
airports, where there is a mixed public-private are private 
activity bonds. So there is a wide range here.
    Now, I do believe it is an area where the committee should 
look at.
    Mr. DOGGETT. There were some standards set in the 1986 
reform that have gradually been eroded or excepted so that 
while at that time you couldn't finance golf courses, now some 
of the subsequent disaster relief proposals have----
    Mr. BUCKLEY. What you absolutely should not do is not 
enact, you know, kind of scattershot disaster relief provisions 
that just simply waive all the limitations on private activity 
bonds.
    Mr. DOGGETT. In our eagerness to respond to disasters, 
whether Texas, New York, Louisiana or anywhere else----
    Mr. BUCKLEY. The midwest, that is correct.
    Mr. DOGGETT [continuing]. Sometimes those standards are 
forgotten, but isn't that the best way to ensure that doesn't 
happen to have strong clear, standards in the law about when 
private activity bonds can be used or to eliminate them 
entirely?
    Mr. BUCKLEY. Well, I think there are standards in the law. 
I would caution against eliminating them entirely because I 
think that will affect some types of infrastructure that are 
valuable and that you will desire. This is an area where I 
think the committee should look at.
    Mr. DOGGETT. Why can't those other forms of infrastructure 
be, to the extent that they deserve any preference or Federal 
subsidy, be financed through general obligation bonds?
    Mr. BUCKLEY. Just because there is a mixed public-private 
use is the only reason.
    Mr. DOGGETT. The Times article suggested that the largest 
beneficiary of private activity bonds had been Chevron.
    Mr. BUCKLEY. That was a disaster-related provision.
    Mr. DOGGETT. And would be the kind of provision that while 
Chevron might get a benefit, Joe's Chevron station that is a 
small business in the same area is not accorded any benefit.
    Mr. BUCKLEY. They could have probably accessed it as well, 
but they did not.
    Mr. DOGGETT. Mr. Taylor, Mr. Hodge, Mr. Parkhurst, I know 
you have raised questions pro and con on bonds generally, but 
specifically on private activity bonds, should they be limited? 
Are new standards necessary?
    Chairman CAMP. Just answer very briefly because time has 
expired.
    Mr. TAYLOR. My answer is, yes, they should be eliminated. 
If you are going to give a benefit, give it to the State and 
local government directly. If they don't want to finance it, I 
don't see a reason that the private sector should benefit in 
any way.
    Mr. PARKHURST. At this point, I think the Governors would 
want to examine all the options on the table before making any 
final decisions.
    Chairman CAMP. All right. Thank you very much.
    Mr. Buchanan is recognized for 5 minutes.
    Mr. BUCHANAN. Thank you, Mr. Chairman, for holding this 
important hearing today, and I would like to thank all our 
witnesses for taking their time out to be here. As a member 
from Florida, I am the only member on Ways and Means, but my 
district, we have 200,000 retirees, and I know that they count 
on municipal bonds as a stable investment.
    Mr. Parkhurst, or any of you, I have got a sense of it 
myself, you know, as an investor over the years, but how safe 
are municipal bonds in terms of a sound investment for 
retirees?
    Mr. PARKHURST. Municipal bonds are probably one of the, if 
not the safest investment that my parents, who are retirees, 
could invest in. I think, and I will defer to Dr. Buckley on 
the specific numbers, but I think it is well below 1 percent 
default rate.
    Interesting point on retirees. Again, citing back to the 
2010 tax date I referenced earlier, it is in my testimony, of 
those taxpayers that identify on their tax forms an exclusion 
for interest for muni bonds, 5 out of 10 of those taxpayers are 
65 years or older. So seniors do comprise a large section of 
investors in muni bonds, either directly or through their 
mutual funds that invest in these products.
    Mr. BUCHANAN. Mr. Buckley, do you have actually a number, a 
percentage or something? I mean, I assume 1 percent. I just 
wanted to kind of hear it.
    Mr. BUCKLEY. I do not have a specific number. The default 
rate has been low in this area.
    Mr. BUCHANAN. Okay. The other thing was just in terms of 
this, do you have any sense of what percentage are owned by 
retirees in terms of these pension funds? Do you have any 
sense, 65 and older individuals?
    Mr. PARKHURST. I don't have a specific answer for you, 
Congressman, I can look into that. I would say, though, just to 
give you a little more macro perspective, the market is made up 
of both retail and institutional investors, and the retail 
investors are who you are referring to at this point, 
individuals who are purchasing. They also include the 
individual investors who have been discussed here as well.
    On the institutional side, the primary investors in 
municipal bonds are P&C, property and casualty insurance 
companies, as well as banks, not necessarily the large banks, 
but more regional and community banks that are reinvesting in 
infrastructure investments within their communities.
    Mr. BUCHANAN. Mr. Buckley, the National Federation of 
Independent Businesses, NFIB, and I have seen that from our 
local chambers as well, they surveyed their members who make up 
the small business community across the country, and 85 percent 
of their members think that Congress should do tax reform, 
change the Federal Tax Code. However, they favor retaining the 
deduction for State and local taxes even in exchange for lower 
tax rates. They want tax reform, but they would like to retain 
the exemptions for State and Federal Governments. Why do you 
think that is, or do you have any sense of that?
    Mr. BUCKLEY. Well, first of all, as was mentioned 
previously, repealing the deduction effectively increases their 
marginal rate. So if you repealed the deduction for State 
income taxes and replace it with a lower rate, you really 
haven't done much. You have substituted one form of marginal 
rate increase for a marginal rate decrease.
    Also, my guess is the small business community has to be 
very concerned about the question of whether corporations would 
have their deduction for State and local taxes repealed. It is 
hard, in my mind, to justify taking the deduction away from 
unincorporated businesses and continuing it for corporate 
businesses.
    Now, in the corporate context, the rationale for the 
deduction is as strong as it is on the individual side, so my 
guess is they are worried about discrimination here.
    Mr. BUCHANAN. One other thing. Bowles-Simpson and other 
groups, advisory panel for the President, want to eliminate the 
deduction, and why is that, do you think? Because at the end of 
the day you would think it would create more jobs, more 
opportunities, put more dollars into the Treasury in terms of 
people being employed, but why did they come up with that 
analysis?
    Mr. BUCKLEY. Revenue. Just revenue to finance rate 
reductions. That is all.
    Mr. BUCHANAN. Thank you, Mr. Chairman. I yield back.
    Chairman CAMP. Thank you, Mr. Buckley. I do appreciate your 
comment that actually reducing the rate would have all 
taxpayers being treated more similarly as opposed to those 
taxpayers in those States that have high incomes and use the 
deduction more. But if you do eliminate that and lower the 
rate, there is not a marginal rate increase.
    Mr. BUCKLEY. There is a marginal rate increase depending--
--
    Chairman CAMP. Not if you lower the rate. Not if you lower 
the rate.
    Mr. BUCKLEY. Depending on the State in which you reside.
    Chairman CAMP. Yes, but you could lower the rate and there 
may not be a marginal rate increase and then you wouldn't have 
tax policy favoring certain States and certain constituencies 
in a way that they don't now.
    Mr. BUCKLEY. Mr. Chairman, I disagree with favoring notion 
here. You know, there are States that are urban in nature and 
therefore they have higher incomes and higher tax deductions. 
There are cities, Seattle in the State of Washington, where the 
tax burdens are higher than they are in the rest of the State. 
Using averages here, it doesn't really, I don't think, 
accurately reflects what is going on.
    Chairman CAMP. All right. Thank you.
    Mr. Smith is recognized for five minutes.
    Mr. SMITH. Thank you, Mr. Chairman, and thank you to our 
witnesses today.
    Mr. Buckley, you briefly touched on your assertion that 
higher taxes in various States are perhaps because of a higher 
cost of living. Shouldn't higher wages generate higher taxes 
per capita?
    Mr. BUCKLEY. That is correct. I mean, the reason some 
States have higher taxes than others is a combination both of 
higher incomes and of higher cost of government, I would argue, 
largely due to the urban nature of the State.
    Now, those States also, as Congressman Rangel pointed out, 
are typically the donor States. They pay a far greater share of 
Federal income tax liability than other States for exactly the 
same reason, they are high-income States.
    Mr. SMITH. But that should also reflect on what their tax 
burden is at the State level and/or local level, correct?
    Mr. BUCKLEY. That is correct.
    Mr. SMITH. Okay. We have heard briefly about the public 
power and taxes on public power and perhaps different treatment 
than private power. Mr. Taylor, coming from a public power 
State, I am curious because I almost feel like there is more 
transparency in terms of, okay, there is tax free municipal 
bond advantages there, but then we know that in other States 
there are power generators in the private sector that enjoy a 
number, in fact, perhaps a smorgasbord of tax benefits. Is that 
accurate?
    Mr. TAYLOR. I am not in a position to compare the States 
and the public power and private power in different States. I 
think my concern was that the Federal Government is providing a 
benefit or a subsidy or whatever, tax expenditure, for State 
and local governments, and I think it then behooves the 
committee to determine where that benefit is going.
    I think Mr. Hodge said earlier, listen, you could 
essentially eliminate tax exemption on municipal bonds and then 
decide where you want the money to be spent. It might be a more 
efficient way to do that. It is not for me to sit here and say, 
okay, it should always go to A or B. That is really your 
decision.
    That being said, if you are going to talk about State and 
local governments and those governmental bodies that are making 
decisions, they should be the ones getting a tax exemption, and 
it should be very clear.
    In the case of Nebraska or other places where public power 
is a big issue, then you have to sit there and say, to what 
extent is the State controlling that, is it substituting for 
private power, at what point should you stop substituting for 
private power and let the private power companies come in? 
Those are governmental decisions that should be taken very 
carefully because you run the risk, with tax exemption, of it 
substituting for the private sector and it remaining that way 
even though the economy changes.
    Mr. SMITH. Okay. Anyone else wish to comment? No? Thank 
you.
    Thank you, Mr. Chairman. I yield back.
    Chairman CAMP. Thank you.
    Mr. Blumenauer is recognized.
    Mr. BLUMENAUER. Thank you, Mr. Chairman. I appreciate 
continuing this process of trying to dive into the Tax Code and 
the implications, and I appreciate the balanced presentation 
here. It gives us a range of concerns.
    I want to go back to the infrastructure piece. I appreciate 
what my colleague Mr. Neal talked about. Mr. Buckley, you are 
providing some balance here. I find it----
    Mr. BUCKLEY. There are two of us, I think.
    Mr. BLUMENAUER. I find it interesting that we are having 
this hearing today when the American Society for Civil 
Engineers is putting out its update of its scorecard, which it 
has been doing over the years. We are still D's, F's, I think a 
C minus may be in there, and the cumulative deficit, by their 
estimate, is $3.6 trillion necessary for the standard between 
now and 2020.
    It is interesting to me that the era of highest economic 
growth and productivity increase, and, by the way, dramatic 
reduction in Federal debt after World War II, occurred when we 
made the investments in our returning veterans for their 
education and enabled them to buy a home. The Interstate 
Highway System is an obvious example, but we had other 
infrastructure investments, in higher education, in aviation, 
in water, in sewer, in areas that now communities are looking 
at skyrocketing rates--by the way, rates that are not tax 
deductible at the local level for utilities--at a time when we 
are scaling back the Federal infrastructure investment.
    And looking at the bill that we just passed that expires 
this Congress for transportation, we are really kind of stuck 
here. It strikes me that looking at adjusting the interest 
exemption in these tax deductible bonds is one of the few areas 
where the Federal Government is actually stepping up and 
providing support for infrastructure investment.
    Do you want to----
    Mr. BUCKLEY. I would agree entirely and also state that it 
is the only stable source of Federal support for local 
infrastructure spending. It is there. It is not subject to an 
extension of the highway bill. It is something that State and 
local governments can plan on. And also it is a form of Federal 
support that has the least amount of Federal involvement in. 
All of the decisions about what infrastructure to invest in, 
how to structure the debt are questions that are left to the 
prerogatives of State and local government with no Federal 
interference. It is a fairly conservative way of delivering 
support here.
    Mr. BLUMENAUER. And I know time is short, Mr. Chairman, so 
I will just prepared to yield back my time, but I think this is 
a very important concept that the committee should consider as 
we move forward.
    I hope that we are spending a little more time looking at 
infrastructure, but the consequences of this investment in 
areas that have tended to be more productive, that have created 
more wealth, that have challenges and opportunities, that 
people have the choice, it is the amount of benefit to the 
communities is commensurate with decisions they have made 
locally. But I think the multiple effects that the entire 
country benefits from in terms of increased economic activity, 
and frankly, reduced pressure for other types of Federal 
investment bears our being careful with how we move forward 
with this.
    Mr. Taylor.
    Mr. TAYLOR. Yes, I would like to comment on that. While I 
actually agree with both of you on this, in terms of the fact 
that the decisions are made locally, that the infrastructure is 
very much needed, the question is, is this the most efficient 
way and are you getting the bang for your buck? And I think as 
an economist and someone who has been involved with this area 
back to 1975, there is no doubt in the economic literature that 
some program like BABs, maybe not at 33 percent or 20, maybe it 
is 28, make it is 25, BABs is a much more efficient way to say 
where the money goes. And I am all for State and local 
governments defining it, but let's make it efficient.
    Mr. BLUMENAUER. And I appreciate the opportunity that we 
can fine tune the way that some of the programs are 
administered. We have had this conversation in the past with 
Mr. Buckley when we were factoring other things. But I just 
stand by my point that I would be very careful about monkeying 
with this.
    Mr. TIBERI [presiding]. The gentleman's time has expired.
    Mr. BLUMENAUER. Thank you.
    Mr. TIBERI. The gentleman from Texas is recognized for 5 
minutes.
    Mr. MARCHANT. Thank you, Mr. Chairman.
    I, too, have heard from every one with of my school 
districts, my cities, counties in my district. I have a very 
unique district. The center of my district is the Dallas/Fort 
Worth Airport, and over the last 50 years that airport has 
spurred growth both in industry as well as population. And I 
started my political career as a city council member and a 
mayor, so I am someone that has sat in meetings and looked at 
water projects, road projects, school projects, projects to 
bring infrastructure to major industry that wanted to locate in 
our town, and made those decisions based on the fact that the 
municipal bond rate was a rate that we could take advantage of 
and expand our infrastructure.
    I don't think there is any mistake that if Congress decides 
to do away with the exemption for municipal bonds, for school 
district bonds, for county bonds, that every single taxpayer in 
my district will have an increase in their taxes. The cities 
have to provide infrastructure. They have to provide water, 
sewer. They have to provide that because they are trying to 
attract the industry, the very industries that are going to 
bring the jobs to that town.
    Now, it might be, for instance, we have in our local town, 
we have Amazon is bringing a 1 million square foot distribution 
warehouse because of its proximity to the airport. Could not 
have done that without a major road project, could not have 
done that without adequate water, without adequate city sewer, 
without an adequate workforce who need schools.
    Our goal to simplify the Tax Code, I agree with. Our goal 
to lower taxes across the board, I agree. But for us to think 
that we are going to be lowering tax rates for our citizens in 
this case, all we are going to be doing is passing that tax 
down to a different level. Municipal bonds provided the major 
catalyst for us making those decisions in school districts, in 
cities, in counties across the nation. In every council 
meeting, every school board meeting, every county supervisor 
meeting, almost every week they are making those decisions to 
create jobs, create the infrastructure for that.
    And so my point today is that maybe we need to look at 
private activity bonds, maybe we should take a very close look 
at the entire spectrum, but the core deductibility of municipal 
bonds, of tax-exempt bonds, all it will do is create a pure tax 
shift. And I would like to have each of yours opinion on that 
comment.
    Mr. Hodge.
    Mr. HODGE. Congressman, I know that property tax issue is a 
very hot issue in Texas these days, and there has been a lot of 
attempts to try to control the growth of property taxes. But I 
would suggest that it is possible that it is the availability 
of municipal bonds and the ability to borrow that has in some 
way contributed to those higher property taxes because of the 
communities and school districts that are over-borrowing and 
thus taxing their local taxpayers. So it is a circular thing. 
And so, you know, it is a chicken-and-egg situation.
    But I would suggest that the evidence shows that if you 
were to eliminate these bonds, it would actually end up 
lowering property taxes overall because communities would not 
borrow as much and spend as much. And so over time I think that 
those property taxes and local taxes would come back down. That 
is what the economic evidence shows.
    Mr. MARCHANT. Mr. Parkhurst.
    Mr. PARKHURST. Congressman, I think your comments are in 
accord with the Nation's Governors. I appreciate those 
thoughts.
    I would like to leave you with an interesting data point 
that I think will help you the next time you have visitors from 
back home. There are proposed next year of $43 billion in lost 
revenue to the Federal Government from the interest exclusion. 
There is also a projected increase, a sale of $400 billion in 
new issuances of muni bonds, about a 10:1 ratio. That is a 
pretty good leverage ratio for the dollars.
    Chairman CAMP [presiding]. All right. Thank you. The 
gentleman's time has expired.
    Ms. Black is recognized.
    Mrs. BLACK. Thank you, Mr. Chairman.
    I think that my colleague from Texas certainly does make a 
valid argument related to the investment and infrastructure, 
but as we read in the New York Times, they reported recently 
that the tax-exempt bonds had been used, as the chairman said, 
for things like a winery in North Carolina and a golf course in 
Puerto Rico, a Corvette museum. I probably should temper my 
comments on that since my husband is a big Corvette person.
    But when we look at these, do you think that this is, first 
of all, an appropriate use for these kinds of projects, as my 
colleague talked about infrastructure, questioning these as 
infrastructures, and then in addition to that, what kind of 
rules could be changed to prevent these types of activities 
from happening in the future?
    So why don't we start with you, Mr. Buckley, and work down 
the other way?
    Mr. BUCKLEY. Well, first of all, I think it is entirely 
appropriate for this committee to examine the rules for private 
activity bonds, and they were tightened in 1986. Now, a lot of 
the examples in the New York Times articles were in response of 
one-time liberalizations of the rules as part of disaster 
relief measures, and I would suggest the committee ought not to 
do that again in the future. I mean, they should tighten the 
rules.
    Now, a lot of what was previously talked about are private 
activity bonds. When you were talking about the airport 
development and all of that, those are private activity bonds. 
And so they do serve, I believe, bona fide public purposes of 
development, helping, you know, as you say, Amazon would not 
have come but for the railroad development.
    The highways in that circumstance may well be considered 
private activity bonds because of disproportionate use by one 
taxpayer. So I believe you should examine those rules. You 
should tighten them, if necessary. But don't use those, you 
know, anecdotal stories in the New York Times to justify repeal 
of a provision that I think has proved to be quite effective.
    Mrs. BLACK. Mr. Taylor.
    Mr. TAYLOR. In some ways I would agree with Mr. Buckley, 
but I would also add that any time you give, and I hate to pick 
on DFW again, if you are going to use the tax exemption there, 
it benefitted certain airlines over other airlines in terms of 
allocation of landing slots and the whole kit and caboodle. You 
had a corporate purpose that was involved in this.
    I have absolutely no problem with the Congressman's 
discussion, the previous Congressman's discussion about water 
and sewer and schools and things like that. I think it is 
imperative that the committee decide to what activities does 
this benefit flow to. Personally, I have a question in my mind 
of any kind of benefit flowing down to one particular 
corporation or another without it being available to everyone, 
and that is what the markets are for.
    So if you limit tax exemption to standard governmental 
purposes that we all could probably agree on here, fine. But 
once it gets into anything that flows to the private sector, 
you should be very, very careful.
    Mrs. BLACK. Mr. Taylor, I want to just tag onto that for 
just a second because you mentioned Build America Bonds. And I 
don't know that much about them. Would they be any different 
than, in making these kinds of determinations, than----
    Mr. TAYLOR. Well, I will go back to a comment that Mr. 
Hodge made earlier on, that the way the tax exemption is 
structured right now a certain portion of the dollar that you 
are providing goes to the investor. And so is that really what 
you want to do? The answer usually is no, and there isn't an 
economist, heck, I have read--when I first got involved with 
munis, the studies were going back to 1963 saying do it, a la 
BABs, do it that way because it is the most efficient way to 
give the money, and let the decision making be at the lower 
level.
    I think the real question is, what is that rate? Is it 28, 
which I have heard bandied about, or 25, that is your decision. 
But it is a much better way to get the bang for the buck.
    Mrs. BLACK. Okay. Mr. Parkhurst.
    Mr. TAYLOR. Rather than tax exemption
    Mr. PARKHURST. Briefly, I would concur with Mr. Buckley's 
comments that working to review the rules would make eminent 
sense to correct anomalies, and I would offer up an opportunity 
for this committee to reach out to States and local governments 
that have the direct hands-on experience with many of these 
private activity bonds--to work in partnership in that.
    Mrs. BLACK. Mr. Hodge, I am out of time, so if you have any 
remarks pertaining to that, if you will submit it, that would 
be great. Thank you.
    Mr. HODGE. I certainly will.
    Chairman CAMP. Thank you. Thank you very much.
    Mr. Pascrell is recognized.
    Mr. PASCRELL. Thank you, Mr. Chairman, to the panelists.
    Good to see you back, Mr. Buckley. I don't see you, but I 
am here. You stated that the debate over tax reform cannot be 
merely driven by tax policy concerns. This committee has to 
take into account the possible collateral consequences of 
changes to longstanding tax benefits. Just give me one sentence 
of summary in your own mind.
    Mr. BUCKLEY. I would use two examples. Home values. I don't 
think there is any economist in the country that doesn't think 
the price of our homes have embedded in them the value of the 
deduction for mortgage interest and real property taxes. I 
really think the Congress has to be very careful about removing 
those benefits. I think it would be quite destructive to have 
further decline in housing prices by reason of what action is 
taken by Congress.
    Employer-provided health care. Almost all of us get our 
health care through our employer. If you repeal the exclusion 
for employer-provided health care, you will see a decline in 
the level of healthcare coverage provided by the employer. I 
think that is a bad thing.
    Mr. PASCRELL. So in solving one, we will create another 
problem.
    Mr. BUCKLEY. You will have to respond with appropriated 
funds if people lose their health insurance.
    Mr. PASCRELL. We discussed it, as you remember, during the 
debate on Obamacare.
    Mr. BUCKLEY. That is correct.
    Mr. PASCRELL. Mr. Hodge, if we follow, if we pursue your 
path, what you are suggesting, we will never ever repair our 
infrastructure for water and sewers in this country. We lose 25 
percent of our water that is already being treated because of 
the antiquated system that we have and will not repair it, and 
the municipalities do not have the money, the States do not 
have the money to do this. So they might as well just wait till 
they have the money. Well, you know what happens in that 
circumstance.
    That is not acceptable. That is not acceptable. And I agree 
with the gentleman from Texas that these things will not get 
done unless these bonds exist, unless these private equity 
bonds exist. We have had legislation before us for 10 years, 
passed in this House 3 times, 3 times, and stalled in the 
Senate. Right, Mr. Camp, Mr. Chairman?
    Chairman CAMP. Very familiar with it.
    Mr. PASCRELL. We need to keep the collateral consequences 
that Mr. Buckley refers in mind, as well as the policy goals we 
wish to accomplish through our Tax Code. One big collateral 
consequence I am concerned about is in the area, and you have 
heard about it, the State and local tax provisions, is what 
would happen to high-cost States like New Jersey if we 
eliminate the deduction for State and local taxes. According to 
the National Association of Home Builders, the average New 
Jersey property owner has $7,398 in real estate deductions. I 
think Texas is close to $5,500 a year. That is more than double 
the national average, the New Jersey number. I believe that 
eliminating this deduction could have a real devastating impact 
on my State and many other States. We need to think long and 
hard about the effect it would have. We have a long way to go 
to get to the $6 trillion the Tax Policy Center says we need to 
find to finance the Ryan-Camp tax reform proposal, and these 
are the kinds of issues we need to examine in depth.
    Mr. Buckley.
    Mr. BUCKLEY. Yes.
    Mr. PASCRELL. Can you describe how impact of eliminating 
the capping of deduction for State and local taxes would be 
different for high-cost regions of the country? And the second 
question is, isn't repealing this deduction just a covert 
marginal rate hike that would double tax individuals' income, 
and how is this different how we treat foreign source income, 
Mr. Buckley?
    Mr. BUCKLEY. Well, you raise the interesting point. We do 
provide a foreign tax credit, a dollar-for-dollar reduction in 
U.S. tax liability for the amount of foreign taxes you pay. 
Nobody has ever asserted that that is a subsidy for foreign 
countries. It is an appropriate measure of reducing the 
potential for double taxation
    We provide a far less generous accommodation for the State 
taxes, an accommodation that I believe is appropriate to 
prevent double taxation. Now, it will have particular impact on 
States with high incomes, but those States typically are net 
donors to the Federal Government.
    Mr. PASCRELL. Thank you, Mr. Buckley.
    Oh, my time is up. Mr. Chairman, yield back.
    Mr. JOHNSON [presiding]. Thank you.
    Mr. Young, you are recognized.
    Mr. YOUNG. Thank you, Mr. Chairman. I thank all our 
panelists for a very interesting conversation today and for 
your appearance here today.
    I represent Indiana's 9th Congressional District, and the 
communities throughout my 13-county district rely heavily in 
various ways on tax-exempt bonds. But the question, I think, 
for many of us policymakers here is, of course, the issue of 
unintended consequences, which has been brought up a number of 
times, sometimes called collateral consequences. I see that 
always as a potential consequence of acting in the Federal 
sphere. You are going to have unintended consequences. What is 
incumbent upon us is to fully weigh all the evidence before us 
and try and mitigate those consequences before we act.
    We also tend to be risk averse here in Washington. So we 
will hear a lot of qualifying language from my colleagues, 
perhaps occasionally from myself about this could happen, we 
need to weigh things very heavily before acting. But at some 
point there is a risk to not changing policies towards a more 
optimal public policy approach of tax-exempt bonds here if one 
exists
    So, you know, I come back to the theme that people really 
don't fear change so much as they fear loss, and if we can 
prove that adopting a new mechanism of funding these 
infrastructure projects and bonding out various projects is 
better, then it ought to be adopted. I am not persuaded as yet 
entirely, but there are some things that I want to explore 
here.
    Mr. Hodge, you said for each million dollar in tax-exempt 
bonds, the Federal Government foregoes $21,000, so that is a 
potential benefit to the Federal coffers at least, could 
conceivably have what is called collateral consequences at the 
local level.
    And you, yourself, Mr. Hodge, have conceded that at least 
initially there might be property tax implications on changing 
the tax status of these bonds. But you alluded to something 
very interesting. You said in the longer term, and you said 
absent this deduction, State and local governments would have 
lower overall taxes and would have smaller budgets.
    I can think of a couple of dynamics that might lead to 
this. Greater project scrutiny at the local level, conceivably, 
might be one reason. Another reason would be greater 
competition for capital between communities and across States. 
Is that a potential thing that would drive the lower overall 
taxes and smaller budgets?
    Mr. HODGE. Yes.
    Mr. YOUNG. Okay. So that is the positive side of the 
ledger.
    The negative side, Mr. Parkhurst, you listed off a number 
of concerns, and I would like to go through those. An increase 
in direct taxes on citizens. So this is the burden-shifting 
concern, right? Do you disagree with the notion, though, that 
in the longer term you might actually see lower overall taxes 
and smaller budgets as a result of changing the tax-exempt 
status, and if so, why do you disagree with that notion?
    Mr. PARKHURST. I think given the dynamics of the country's 
economics, conditions, regions, it is hard to give you a 
definitive answer on a hypothetical at this point right now. I 
would argue that what we can see happening or what we could 
perceive happening is just that point, is that shift in 
projects that either don't get done because the State and local 
officials make a rational decision that with limited dollars we 
can only do X and not Y, or if the decision is made that we 
must pursue a particular infrastructure project either because 
it is crisis driven or the public has made a decision, either 
through referenda or other by electing individuals who are 
making these decisions, to increase their taxes. I think then 
that is the response that I am looking at in the short term. 
But long term, at this point, I don't think I could give you a 
definitive answer to your question.
    Mr. YOUNG. Okay. There are various academic studies 
supporting this idea that there will be long-term benefits to 
changing the tax-exempt status. Doug Holtz-Eakin and Larry 
Lindsey, for example, have studies that the National Governors 
Association may consult to get further clarity on this.
    Mr. Hodge, got about 10 seconds left, I think. You have any 
thoughts about this?
    Mr. HODGE. No, the economic evidence is very clear, that if 
you were to remove these subsidies, then overall spending at 
the State and local level would decline and taxes would reduce 
overall as well.
    Mr. YOUNG. Okay. We will continue to explore this. I yield 
back.
    Mr. JOHNSON. Thank you.
    Mr. Davis, you are recognized.
    Mr. DAVIS. Thank you very much, Mr. Chairman. And I was 
thinking one of the good things about being near the end is you 
get a chance to hear all of those things that have been said 
before you. And when the question arose, came up about Build 
America Bonds, I just happened to have six pages of projects 
that were either done or completed or underway in the State of 
Illinois, most of which, I suspect, would not have been on the 
table unless these bonds were available.
    Also, I thought about the article in the New York Times. I 
grew up in rural America, and people often used containers to 
take a bath. They didn't all have indoor plumbing. And when 
they got ready to throw out the bathwater, there was an old 
saying that don't throw out the baby with the bathwater. I 
mean, there are some components of some things that may not be 
as effective or as good, but that doesn't mean the whole 
concept is not worthy.
    Like my good friend from Texas, Mr. Bishop, I think many of 
us have had some experiences with local government, and I also 
think that many of us are firmly convinced that many local 
infrastructure projects would never get done if the bonds were 
not available, that they would just simply lay flat, nothing 
would happen, and the need would continue to exist. So I think 
that they have been lifesavers for infrastructure development 
in these communities all over America.
    But let me ask, there are some proposals--and, Mr. Buckley, 
let me ask you--there are proposals to reduce the tax exemption 
on municipal bond interest, such as one to cap the exemption 
for certain taxpayers at 28 percent, would have severely 
detrimental impact on national infrastructure development and 
the municipal market, raising costs for State and local 
borrowers and creating uncertainty for investors. These 
investors' fears translate into investor demands for higher 
yield from State and local governments issuing the bonds. If 
these entities are unable to satisfy investor yield demands, 
then isn't it true that either, one, these much-needed 
infrastructure projects would not move forward, or the cost of 
these projects would be passed directly to State and local 
taxpayers?
    Mr. BUCKLEY. You have two problems, I think, when you 
legislate in this area. First is the uncertainty that you are 
talking about. Just the fact that this hearing is going on is 
creating uncertainty in the market about the long-term 
viability of the tax exemption, thereby demanding higher 
yields.
    The question whether it is going to increase cost and 
reduce infrastructure that higher yields, I think that is 
absolutely correct. You can assert that there are economic 
benefits from repealing the exemption only if you believe that 
it is in the best interests of this country to have lower 
investment in public infrastructure.
    You know, when Mr. Hodge talks about lower spending at 
State and local levels, it is all infrastructure. So if you 
believe we have overinvested in infrastructure, which I don't 
think anybody does, then you should entertain proposals to 
repeal this benefit. If you believe that infrastructure is very 
valuable, then you should not.
    The cap has some impact on tax-exempt rates. I have seen a 
lot of different estimates and I am really not in a position to 
judge which one is right. I mean, some show it as fairly low. 
Some show it as fairly high.
    Mr. DAVIS. In your written testimony you also indicated a 
need to maintain a balance between individual exemptions or 
deductions and corporate deductions. Why do you think that is--
--
    Mr. BUCKLEY. Well, I think it goes back to my answer about 
small businesses. I don't know how you could deny individuals 
the deduction for State and local taxes and at the same time 
permit corporate taxpayers to deduct those items. I just think 
it is not a politically viable solution.
    Mr. DAVIS. Thank you very much. I yield back.
    Mr. JOHNSON. The gentleman's time has expired.
    Mr. Paulsen, you are recognized.
    Mr. PAULSEN. Thank you, Mr. Chairman. This actually is a 
very, very good hearing, and I heard from a number of folks 
back home.
    I want to follow up on what Mr. Davis was actually asking, 
because when the President came out with his budget proposal, I 
think it was last fiscal year's budget proposal, just a year 
ago, he actually recommended that cap, you know, at the 28 
percent level for that exclusion on municipal bond or, you 
know, State and local bond deductions. And I am curious, what 
would be the effect--you know, aside from the trade-offs of the 
policy issue we have been having about whether you allow it or 
don't allow it--what would be the effect if that was--if that 
policy went forward as a part of, you know, a budget plan this 
year or next year in the near term? What is the average length 
of these bonds that are let out right now; is it 20 years, is 
it 30 years? What is the effect of these sort of--these 
existing contracts that are in the market right now? What would 
be the effect versus, you know, phasing it in or not phasing it 
in? I am just--in terms of the actual, it is more of a 
technical question, but what happens specifically to the 
market, Mr. Parkhurst?
    Mr. PARKHURST. Some of the estimates that I have seen, I 
think they are rather conservative depending upon the 
percentage cap you are talking about. Anywhere, as I said 
earlier, from six-tenths of a point to, you know, 1\1/2\ points 
in a bump-up in your yield.
    You are back to the key issue here, which is risk and 
certainty, and obviously investors are looking for low risk and 
high certainty. When you are talking about any type--just as 
Mr. Buckley said, the mere fact that this hearing is being held 
today is creating uncertainty in the market about what changes 
may happen, and that is going to have an impact on the market 
going forward.
    Mr. PAULSEN. Mr. Taylor.
    Mr. TAYLOR. Yes. Let me kindly point out that this focusing 
on capping individual interest rates, the deduction for State 
and local interest is really looking at the problem the wrong 
way. If your concern, and Mr. Davis' concern, Mr. Marchant's 
concern is for financing infrastructure, you should be looking 
at ways in which to expand the market of potential investors, 
and right now because tax exemption exists for the interest on 
State and local bonds, you are limiting it to people who are 
in, by definition, higher-income tax brackets.
    I think everyone who has ever been in the market--and one 
of the reasons BABs were somewhat, from my vantage point, very 
successful was because it suddenly expanded the number of 
potential investors. What that does is eventually lower 
interest rates for people. It means the Federal subsidy is a 
little lower. That sort of thing is what you should be looking 
at, from my vantage point as an economist, and looking at 
markets rather than the reverse.
    Mr. Buckley is absolutely right. In 1986, when tax reform 
was going through, the market froze because of discussions 
about how you should tax individuals.
    Mr. PAULSEN. Mr. Hodge, maybe you can comment. I mean, 
obviously we have got uncertainty in the marketplace on the 
healthcare law right now that is not giving predictability to 
the business community, but, I mean, just give a perspective of 
what the existing market would be like from a bond transition.
    Mr. HODGE. Well, I think we have to be very careful about 
overdoing the uncertainty element. That would mean that we 
would never talk about tax reform----
    Mr. PAULSEN. Right.
    Mr. HODGE [continuing]. Because somebody might be 
uncertain.
    Well, let's look at the certainty here, and that is State 
and local governments this year are spending $120 billion a 
year on the interest on their debt, their accumulated debt. 
That is more than they spend on police protection, twice as 
much as what they spend on parks and recreation, twice as much 
as they spend on sewerage, on fire protection, et cetera. They 
have loaded themselves with debt to the detriment of other 
elements of their budget. So while they are crying poor and 
poverty now, that they can't afford to do certain things, a lot 
of is because they are crowding out their own budgets with the 
amount of debt they have taken on.
    That is not our fault, but it can be attributed to the 
municipal bond exemption, which affords them the opportunity to 
overborrow and thus crowd out the things that they think are 
most important.
    Mr. PAULSEN. Okay. Mr. Parkhurst.
    Mr. PARKHURST. Just a quick note on that. I can't speak to 
the interest amount, but I can tell you that the current 
outstanding bond market is $3.7 trillion. So, again, the 
leverage ratio is pretty good.
    Mr. PAULSEN. Okay, that is good.
    Thank you, Mr. Chairman. I yield back.
    Mr. JOHNSON. Thank you.
    Dr. McDermott, you are recognized.
    Mr. MCDERMOTT. Mr. Reed? I believe Mr. Reed is next.
    Mr. JOHNSON. I had McDermott, I think.
    Mr. MCDERMOTT. Thank you, Mr. Chairman.
    I am listening to this whole thing, and, Mr. Buckley, you 
tell me that Seattle has a higher tax rate or pays higher taxes 
than other places in the State of Washington, and that is true, 
because we do these bonds for housing and all sorts of things 
in the city, and we tax ourselves for them, and it seems what--
I am having trouble figuring out what the upside of getting rid 
of municipal bonds is, because all I hear is Mr. Hodge, who 
says that, well, we will get a smaller government out of this, 
and people, they will do it with their own money or something.
    I am not--I am trying to figure out, does the Federal 
Government have this pot of money which we dole out, and we 
bring back earmarks so that we can get certain money, or since 
we are not using the tax-exempt status and let the local areas 
do their own thing, then I guess we have got to come here and 
try to get some earmarks back. Is that--or how are we going to 
get the infrastructure built is really what I am having a hard 
time. I hear that BABs are good. All three of you.
    Mr. BUCKLEY. Right.
    Mr. MCDERMOTT. Mr. Parkhurst, Mr. Taylor, Mr. Buckley, you 
all say they are good, right?
    Mr. TAYLOR. It is a better way to do it than to do it as 
you currently do it.
    Mr. PARKHURST. I want to at least be clear that what the 
Governors would support is an all-of-the-above strategy, 
building activity bonds together with existing tax exempts need 
to be part of the tool kit, not looking to substitute for the 
existing market.
    Mr. BUCKLEY. Let me also agree. I think Build America Bonds 
are a complement to tax exemption. It gives the issuer a 
choice, and it does make--even for the issuers that choose to 
use traditional tax exemption, it means that they will receive 
much more of the Federal revenue cost because it makes the 
whole market more efficient.
    Mr. MCDERMOTT. So taking--getting rid of the tax-exempt 
municipal bonds, the only upside is that we would then have 
some money we could use to make a revenue-neutral reduction in 
rate on corporations to 25 percent; is that correct?
    Mr. BUCKLEY. It is essentially the debate that this 
committee is having is do you repeal these more targeted tax 
benefits to finance rate reductions. And this is where I will 
continue to disagree with Mr. Hodge. The only economic benefits 
that can come from repealing the exemption are based on the 
fact that this country will be better off with less public 
infrastructure. And I would argue our problem is inadequate 
public infrastructure, and if you don't subsidize 
infrastructure this way, which has no earmarks, no Federal 
involvement basically, you will be forced to find another way.
    Mr. MCDERMOTT. We will be forced back to our old habits of 
appropriated earmarks?
    Mr. BUCKLEY. Appropriated funds.
    Mr. TAYLOR. If I might, you are right in some ways in 
saying there is no Federal involvement in the initial decision 
of what infrastructure projects go forward and the like, and 
while I subscribe and agree with that, the fact of the matter 
is by issuing tax-exempt bonds, you create the possibility of 
arbitrage on the part of the issuer, and then I tried to lay 
out in my prepared statement that has led to a significant 
amount of abuse. And so if the committee wants to do what you 
have suggested, Mr. Buckley, which is have both, then I think 
you have to look at solutions to dealing with the arbitrage, 
forcing issuers to invest in State and local government 
securities at the Treasury rather than having it done in the 
free market, or some other steps to maintain the integrity of 
that market.
    Mr. BUCKLEY. I don't disagree there have been problems in 
the tax-exempt bonds; that is clear. That means that this 
committee should take targeted responses, and then perhaps what 
you just suggested is the right response to those abuses. You 
should not let the abuses nor the New York Times article to be 
used as an excuse to eliminate a fairly valuable support for 
local and State investment in infrastructure.
    Mr. MCDERMOTT. That, I think, is sort of like medicine. You 
can find an individual case one place or another of a problem, 
but that really doesn't deal with the fact you have to deal 
with all the people. And when you are looking--you talk about a 
significant amount of abuse. Could you put a number around 
that? Are you saying 2 percent, or 25 percent, or 50 percent is 
abuse?
    Mr. BUCKLEY. I will let--I think it is de minimis, but I 
will let----
    Mr. TAYLOR. Well, I think it is all in the eye of the 
beholder. Personally, where financial firms have paid since 
1986 almost a billion dollars in fines and penalties for 
abusing the arbitrage restrictions, engaging in collusion, pay-
to-play schemes and the like in order to take advantage of 
this, that, to me, is not the right way to promote, you know, 
national infrastructure programs that will make this a healthy 
market. That is, in fact, why I was very strong in my remarks 
about supporting BABs, because it does away with all of those 
potentialities.
    Mr. JOHNSON. The gentleman's time has expired.
    Mr. MCDERMOTT. Thank you, Mr. Chairman.
    Mr. JOHNSON. Mr. Reed, you are recognized.
    Mr. REED. Thank you, Mr. Chairman, and thank you, Mr. 
McDermott, for the attempt at courtesy, but you were here 
first, so I appreciate that.
    You know, I found this conversation very interesting as a 
former mayor and now a Member of Congress, and I have seen 
firsthand the benefits of municipal financing and municipal 
investments through local and State capital bonds.
    And, Mr. Hodge, I want to give you an opportunity, because 
I think you are eager to have that opportunity, in response to 
Mr. Buckley's conclusion that what this will lead to by 
removing this exclusion is less of an investment in 
infrastructure, because I think we have broad support that our 
infrastructure needs are significant, they need to be made in 
America, our investments there. And so I want to give you an 
opportunity to directly respond to Mr. Buckley's conclusion 
that you are in error.
    Mr. HODGE. Sure.
    I think we have to be very careful about being sort of one-
column accountants here, and what we hear a lot of is just the 
benefits of these particular programs, and we hear none of the 
downside. And I think that equalizing the financing of a public 
infrastructure and a private investment will lead to a better 
economy in the long run.
    I don't think that the person who wants to borrow money in 
order to invest in a new factory should have to compete with a 
local community that wants to borrow the same amount of money 
in order to build a sports stadium. I don't think that that 
leads to positive outcomes in the economy; I think it leads to 
a negative. And, as the economic research shows very clearly, 
it shows it leads to overborrowing, overspending, and 
ultimately overtaxing at the local level.
    And I think to turn that around, we need to equalize the 
treatment, the borrowing costs, for both private borrowers and 
the public, and that way you get the best economic 
efficiencies, and you get an equal rationalization of these 
kinds of investments, an equal trade-off in--or the balance 
between public investment and private investment.
    Mr. REED. But to follow up on that, though, would that 
still provide adequate financing for the necessary 
infrastructure? Because you touched on a thing when you 
referenced the sports stadium, because one thing I am hearing 
in this conversation is--and potentially on abuses and in the 
written material that I read--is there an issue of definition 
of infrastructure? Because as a mayor, when I was dealing with 
issues of water system replacements, sewage replacements, there 
was no way I was going to be able to pay for that based on my 
tax revenue coming in. I had to have a capital plan 20, 30 
years out, and part of that capital plan was not only the year-
to-year tax revenue that was coming in, but it was also the 
leveraging of the dollar that I could get from the municipal 
financing market to build that capital. And a lot of these 
projects, as you know, are not 1-year projects. They are 30-, 
20-year projects.
    So would your proposal still allow for an adequate funding 
stream for local--I am really talking about local, not so much 
on the State--local and county level to do the necessary 
investments that our infrastructure demands outside of sports 
stadiums and all that? Because I do believe there is a question 
of what is a definition of a qualifying infrastructure that is 
worthwhile to take a look at.
    But get beyond that, do you still see that you would have 
the revenue streams coming in?
    Mr. HODGE. Well, I am not saying that local governments 
shouldn't be able to borrow for the long term, absolutely not. 
They should just pay the same interest rate as a company that 
wants to build a wafer-fabrication plant, or a pharmaceutical 
plant, or some other sort of private investment that is also 
going to have a huge impact on a local community. Those rates 
should be the same. There shouldn't be a subsidy, an interest 
rate subsidy, for the public just simply because it is public.
    Mr. REED. Mr. Parkhurst, please.
    Mr. PARKHURST. Congressman, I am struck by your remarks 
because I think you are inviting a subsequent discussion about 
questions around public-private partnerships as an innovative 
tool to finance.
    I think that your conversation lends to a great discussion, 
because there is a great model here of outcome-based-value-for-
money analysis where the public sector is looking to get 
something built, but they don't have the front-end capital to 
do it. The private sector is looking for a stable revenue 
stream in the long term, and the way, for instance in the U.K., 
how this has been perceived--and let me be clear, in the U.K. 
when you are looking at public-private partnerships, or as they 
are calling it Private Finance 2, going forward here, that is 
only 10 percent of their finance. And so it is back to the 
argument that I have made about everything needs to be in the 
tool kit that is available here.
    But you are looking at a situation where the public-private 
partnership provides for front-end capital for the construction 
costs that the private entity is contributing; the public 
sector, in your case, your home community, doesn't pay a dime 
until that infrastructure is online, and it meets all of the 
obligations and outcomes that you as one of the parties 
negotiating this deal expect. Then going forward you have a 
long-term relationship with the operator, where the local 
government or community or State is paying regular operational 
costs going forward.
    So it is an interesting option that I think would really 
benefit discussion going forward.
    Mr. REED. I appreciate that.
    My time has expired. I yield back.
    Mr. JOHNSON. That was a great closing comment. Thank you 
all. I know you recognize the problems down at the local level, 
and I hope we do, too. This is a difficult program that we are 
embarking on, and I thank you for your help. Each and every one 
of you made good comments. Thank you for being here.
    The committee stands adjourned.
    [Whereupon, at 12:14 p.m., the committee was adjourned.]

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