Is this the beginning of the end of tax-exempt bond financing by public entities in the United States? Many observers have long suspected that there was a hidden agenda in Washington to remove the tax-exempt status of municipal debt. The regulatory climate in recent months has been anything but friendly towards public finance at the state and local levels. On the one end, the Securities and Exchange Commission and Municipal Securities Rulemaking Board have proposed rules for secondary market disclosure and record keeping that threaten to bring the industry to its knees. Now the other shoe is about to drop with a report by the General Accounting Office.

The GAO report calls for Congress to step up scrutiny of federal tax expenditures and specifically mentions the tax-exempt interest on municipal bonds as an area to examine. The report continues that the Congress has spent a great deal of time carefully watching spending programs but has not scrutinized tax expenditures. Among other recommendations, the GAO suggests that the revenue losses from tax items like "exclusion of interest on state and local government bonds" be listed alongside direct expenditures.

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