Good morning and thank you for joining us today.

As part of the Committee’s effort 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 governmental income from Federal income tax,
• The itemized deduction for State and local income, property, and sales taxes,
• 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’ve 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, these 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 those proposals.

Because such a wide range of policymakers has 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 – claimed 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 whether 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 law affects them.  These reports will be important to have as we begin to explore what changes, if any, should be considered, and I am hopeful that they will take the opportunity to share their thoughts.  

I’d 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.  We look forward to your testimony.

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