[Congressional Record Volume 141, Number 141 (Tuesday, September 12, 1995)]
[Senate]
[Pages S13378-S13379]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


   TREATMENT OF MUNICIPAL BONDS UNDER S. 722, THE UNLIMITED SAVINGS 
                           ALLOWANCE TAX ACT

  Mr. DOMENICI. Mr. President, I have noted in recent weeks commentary 
from some analysts and in some publications that the proposals for 
treatment of municipal bond interest in the USA tax plan which I have 
coauthored with Senator Nunn would possibly, severely penalize 
participants in the municipal bond market. As I have explicitly stated 
before, it is not, repeat not, the intention of this Senator that 
participants in the municipal bond markets--whether investors, issuers, 
or other people--be penalized by the USA tax concept. 

[[Page S 13379]]

  In my judgment, the questions raised by analysts about reducing the 
savings deduction by the amount of tax-exempt income can be resolved 
when the actual writing of tax reform legislation occurs in the future. 
It is my intention during those deliberations to make sure that 
municipal bonds retain a preference.
  It is important to recognize that if the USA tax plan were to be 
enacted it would include significant incentives for savings and 
investment--the unlimited savings allowance--which defers Federal 
income taxes on any income saved or invested. As individuals change 
their behavior to save and invest more, the national savings pool will 
increase. In addition, the USA tax removes the bias for companies to 
use debt financing instead of equity financing. More companies may 
choose equity financing. These changes in the business Tax Code may 
lower the demand for borrowing. Increasing the savings pool will lower 
interest rates and the cost of capital. Lower interest rates will 
benefit all Americans who have to borrow. Since States and 
municipalities are big borrowers because they issue large quantities of 
bonds, lower interest rates should significantly benefit them, separate 
and apart from the specific USA tax provisions dealing with the tax 
treatment of municipal bonds.
  I hope that this statement clarifies matters for participants in the 
municipal bond market who may fear that either the USA tax plan would 
penalize them, or will make issuance of municipal bonds for legitimate 
governmental purpose more expensive in the future. Neither of those 
outcomes is the intent of this Senator and I will do all I can to 
insure that neither occurs.
  Mr. NUNN. Mr. President, I would like join my good friend from New 
Mexico in trying to alleviate the fears of those concerned about the 
USA tax proposal's treatment of municipal bonds. In crafting our 
proposal, we explicitly elected to retain a preference for investments 
in municipal bonds, and we did so primarily to preserve the ability of 
State and local governments to obtain capital for needed infrastructure 
improvements. It was never our intention to undermine our country's 
municipal bond market.
  As Senator Domenici pointed out, some analysts believe the manner in 
which our proposal is crafted could erode substantially the current tax 
preference for municipal bond investments. Others, including an 
editorial at the Bond buyer, take a much more optimistic view and 
equate our proposal as being far too generous in its treatment of 
municipal bonds. I believe the truth falls somewhere in between these 
two analyses.
  In the USA proposal, we have essentially equalized the tax treatment 
of all investments, including those investments in municipal bonds. All 
investments under the USA proposal are tax- deferred. However, the USA 
proposal makes an important distinction about the tax treatment of the 
returns from these investments. The returns from investments other than 
municipal bonds would not be tax exempt unless the returns are 
reinvested in their entirety. On the other hand, returns from municipal 
bonds would be tax exempt and could be spent or reinvested without 
future income tax consequences. I believe this is an equitable outcome 
regarding the tax treatment of municipal bonds. If another approach, 
consistent with the overall goals of the USA proposal, especially 
revenue neutrality, can be found in this area, I am more than willing 
to consider such proposals.
  Mr. President, before yielding the floor, I would like to raise a 
final point. I find it very interesting about the absence of any 
concern about the elimination of any, I repeat any, preference for 
municipal bonds under either the flat tax or the national sales tax 
proposals. I do not mind the criticism of our proposal. Constructive 
criticism is useful and can work to improve our proposal, but it would 
be refreshing to have an informed, factual comparison of all the tax 
replacement proposals and their tax treatment of municipal bonds, 
rather than a Chicken Little approach often evident today.


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