The principles of federalism which have historically included the exemption from federal taxation of interest on state and local government obligations must be preserved and enhanced by the Congress and the President of the United States. This is even more essential because of the United States Supreme Court's decision in South Carolina v. Baker.
By restricting the doctrine of reciprocal tax immunity, the Court has substantially eroded Constitutional barriers to the taxation of interest on state and local government obligations. The Court, in reaffirming its 1985 decision of Garcia v. San Antonio Metropolitan Transit Authority, also greatly expanded the responsibility of Congress to protect, and its power to destroy, essential state and local government activities.
The financing of state and local government projects through the issuance of tax-exempt debt is critical to the ability of state and local governments to meet infrastructure and other public service needs of their citizens. It is the longstanding policy of the Government Finance Officers Association (GFOA) that state and local government obligations issued for public purposes must remain immune from federal taxation.
Inasmuch as the power to tax remains the power to destroy, Congress and the President must recognize that when the federal government interferes through taxation with sovereign activities, it destroys the ability of state and local governments to be meaningful partners contributing to the vitality of the economy. Tax immunity must also remain the reciprocal in order to maintain the delicate balance of power between the states and the federal government.
GFOA, in concert with others, will spearhead an effort through legislative, judicial and other means, including the exploration of the appropriateness of callling upon the Congress to propose a constitutional amendment, to assure that the national government does not interfere with traditional methods of state and local government financing.
- Publication date: May 1988