The Internal Revenue Service’s National Taxpayer Advocate is urging Congress to make tax reform its highest priority and to simplify the federal tax code by reassessing the need for every tax expenditure, including the exclusion of tax-exempt municipal bond interest from income.
Nina E. Olson made the plea in an annual report to Congress released Wednesday that says lawmakers should “employ a zero-based budgeting approach” to comprehensive tax reform that “starts out with the assumption that all tax benefits will be eliminated and adds tax benefits back only if members conclude that the public policy benefits … outweigh the complexity burden.”
Mike Nicholas, president and chief executive officer of Bond Dealers of America, said, “In a test of whether benefits outweigh complexity burdens, tax exempt bonds will pass with flying colors – while the complexity created by capping the exemption will fail that test. Tax exempt bonds have a 100-year track record of stability for investors, and their broad acceptance means state and local government issuers have a simple mechanism for affordably financing critical infrastructure. The federal government should not tinker with this equation.”
Olson’s report acknowledges that the largest tax expenditures have wide-ranging support. Whenever proposals are made to reduce them, affected groups mobilize quickly to generate public opposition, the report said.
But broad support for tax reform can be built if there is a substantive dialogue about the required trade-offs between tax rates and tax breaks, Olson said in the report.