State and Local Governments Lose Battle against Federal Preemption
GFOA Newsletter Tuesday, February 16, 2016
Despite strong sustained opposition from GFOA and other groups representing local government, Senate leaders announced a legislative deal that would compromise local governments’ ability to deliver essential services to their communities. Senators dropped their objections to the inclusion of the Permanent Internet Tax Freedom Act (ITFA) in the Trade Facilitation and Trade Enforcement Act conference report (HR 644) and approved the legislation in exchange for a commitment from Senate majority leadership to provide floor time for a discussion on the Marketplace Fairness Act (MFA) later this year. The move permanently removes local tax policy control on telecommunications services in exchange for mere consideration of MFA, with no guarantee as to the outcome.
The deal was made on February 10, but the ITFA has long legislative history. For nearly 15 years, GFOA has pressed Congress to lift the temporary moratorium prohibiting states and their local governments from raising revenue to supplement the costs they bear, including expanding the infrastructure used to facilitate the expansion of broadband fiber. The ITFA moratorium, originally passed in 1997 to protect the then-nascent internet industry, is now not only permanent, but also lifts the clause protecting seven states’ grandfathered ability to collect these revenues (over a four-year period). The legislation, to be enacted in 2016, will essentially exempt an entire (and enormously fast-growing and prosperous) sector of the economy – the telecommunications and cable industries – from state and local taxation.
Turning our sights to the other side of the bargain, it is now more important than ever for state and local governments to help members of Congress understand the considerable importance of passing MFA. Although there is no indication of when MFA will be called up for discussion on the floor of the Senate, GFOA’s Federal Liaison Center will continue to urge Congress to support any efforts to advance legislation that would finally bring federal law into the digital age by enabling state and local governments to collect sales taxes on online purchases that are already owed. To help you with this outreach, please feel free to visit and use materials on the Marketplace Fairness Act Resource Center.
U.S. House Approves Bill to Classify Muni Securities as High Quality Liquid Assets
On February 1, the House voted to approve HR 2209, bipartisan legislation that would require federal regulators to classify all investment-grade, liquid, and readily marketable municipal securities as high quality liquid assets (HQLA). This important legislation is necessary to amend the liquidity coverage ratio rule approved by federal regulators last fall, which classifies foreign sovereign debt securities as HQLA while excluding investment-grade municipal securities in any of the acceptable investment categories for banks to meet new liquidity standards.
Not classifying municipal securities as HQLA would increase borrowing costs for state and local governments to finance public infrastructure projects, as banks would likely demand higher interest rates on yields on the purchase of municipal bonds during times of national economic stress, or even forgo the purchase of municipal securities. The resulting cost impacts for state and local governments could be significant, with bank holdings of municipal securities and loans having increased by 86% since 2009.
GFOA has been leading advocacy efforts to support this legislation and sincerely thanks Representatives Luke Messer (R-IN) and Carolyn Maloney (D-NY) for their leadership in advancing this important bill, as well as all of GFOA members who sent letters to their federal elected leaders urging support for this bill. Our attention now turns to the Senate, where we are working with a group of bipartisan Senators to introduce a Senate companion bill to HR 2209. Stay tuned.
