GSEs: Implications of Removing State and Local Tax Exemption

Pursuant to a congressional request, GAO discussed the: (1) basis for exempting government-sponsored enterprises (GSE) from state and local taxation; and (2) implications of removing the exemption. GAO noted that: (1) the Supreme Court has held that federally chartered and supervised corporations are exempt from local and state taxation under the Constitution's supremacy clause except where Congress has permitted taxation; (2) the exemption may increase federal tax revenues, since state and local income taxes are deductible in calculating federal income taxes; (3) removing the exemption would likely increase the cost to home borrowers and reduce the price paid to financial intermediaries for loans; (4) the exemption makes GSE more competitive, but who actually benefits from the exemption is unknown; (5) the Federal National Mortgage Association (Fannie Mae) will be the most-affected GSE if the exemption is removed for the District of Columbia; and (6) Fannie Mae could respond to the exemption removal by reducing its shareholders' dividends, since competition will prevent it from passing most of the cost on to borrowers.