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An analysis of Bentsen II urban aid plan.

The Senate Finance Committee reported Bentsen II, or the Revenue Act of 1992, HR 11, on July 30, authorizing the creation of up to 25 enterprise zones, creating a new kind of municipal bond program for distressed cities, creating new incentives for bank investment in distressed cities and medium sized cities, and simplifying a number of municipal bond problems facing cities.

The legislation also included a number of revenue raising provisions adversely affecting cities as part of the committee's efforts to raise $21.8 billion, so that there would be a revenue neutral impact of the bill on the federal budget.

As with almost any major tax bill, it is long and complex. The brief description of the bill alone exceeds 340 pages. Following is a description and analysis of the key provisions affecting cities and towns.

Distressed city and town provisions:

Bentsen II creates a special new economic development tool for all distressed cities and towns meeting the eligibility requirements for designation as an urban or rural enterprise zone. The tool is a new kind of municipal tax exempt bond, called qualified enterprise zone bonds (QEZBs). Those bonds would be 50 percent exempt from the state private activity volume bond cap. The purchase or carrying of such bonds would be deductible to banks - creating an incentive for local banks to become partners with distressed cities and towns in investment and development.

How is a city or town eligible?

In order to be eligible as an enterprise zone, an area in a community must meet all of the following: (1) a population of at least 20,000 (10,000 in the case of a rural zone); (2) a condition of pervasive poverty, unemployment, and general economic distress; (3) be in one contiguous area; (4) be located in not more than two states; (5) have poverty rates of at least 25 percent in each of the area's census tracts; (6) have poverty rates of at least 35 percent in each of at least 80 percent of the area's census tracts; and (7) a satisfactory course of action adopted by the state and local government designed to promote economic development in the area.

The course of action provision requires the state and local government to agree in writing that they will adopt a specified course of action to reduce burdens of employers or employees in the area, including: certification of availability affordable commercial property insurance; necessary rehabilitation of publicly owned property; increased or more efficient delivery of local public services; community involvement (public or private) in providing jobs or job opportunities and training and financing; special preferences for contractors owned and operated by socially and economically disadvantaged groups; programs to encourage local financial institutions to invest in locally owned small businesses; and special preferences for allocations of the state's low income housing credit ceiling or private activity bond cap in the area.

What are the tools for eligible communities?

QEZBs: Bentsen II would authorize cities and towns with enterprise zone eligible areas to issue a new kind of tax exempt facility bonds, subject to the state private activity bond volume cap - but only at a 50 percent rate. The bonds would be similar to small issue industrial development bonds (idbs), except that they would not be limited to manufacturing and, for example, a $1 million bond would only count $500,000 against the state volume cap.

The bonds could be issued to finance land, plant, and equipment up to an aggregate amount of $1 million per bond financing. The proceeds of the bonds would be required to be spent within 18 months and could be issued at any time during the two-year period following the certification of the area as "enterprise zone eligible."

QEZBs would be bank deductible. That is, any bank or financial institution would be permitted to deduct 80 percent of its cost or purchasing or carrying a QEZB issued by an eligible city or town.

If my community is eligible, how does it get selected as an enterprise zone?

Bentsen II authorizes the Secretary of HUD to designate 15 urban zones (up to 6 in 1993, 4 in 1994, 3 in 1995, and 2 in 1996), the Secretary of Agriculture to designate 8 rural zones (up to 3 in 1993, 2 in 1994, 2 in 1995, and 1 in 1996, and the Secretary of the Interior to designate 2 Indian reservations (1 in 1993 and 1 in 1994). The designations would remain in effect for 10 years.

The selections would be based upon three equally weighted criteria:

1. the strength and quality of promised contributions by state and local governments relative to their fiscal ability;

2. the effectiveness and enforceability of the guarantees that the promised courses of action will be implemented; and

3. the ranking relative to other nominated areas with respect to the poverty rate of the nominated area.

What are the tax incentives for Enterprise Zones?

Designation as an enterprise zone makes the following tax incentives available:

* employer wage credit: the bill would provide a 40 percent credit to employers for zone residents who do most of their work within the zone;

* expansion of the targeted jobs tax credit to zone residents;

* expensing: the $10,000 expensing limit would be increased to $75,000 in enterprise zones;

* accelerated depreciation for qualified zone businesses;

* ordinary loss treatment;

* stock expensing; and

* low income housing tax credit expansion: the bill would increase the present value in EZ areas to 91 percent compared to the regular 71 percent rate.

What are the changes in municipal bond provisions?

* Bank Deductibility: The bill would increase the so-called small issuer bank deductibility provision from $10 million to $25 million annually. This would permit banks and financial institutions to deduct their costs of purchasing and carrying cities' governmental bonds for any city expecting to issue up to $25 million of such bonds annually. The proposal would also permit pooled bond financings to qualify for this exception in certain circumstances.

* Simplify Arbitrage Rebate Requirement: The bill would expand the six-month exemption from the rebate requirement to a city or town that has spent 95 percent of its issues proceeds within the six month period.

* Simplify Construction Bond Compliance: The bill would exempt earnings on bond proceeds invested in bona fide debt service funds from the arbitrage rebate requirement if the spending requirements of the 24-month exception were otherwise satisfied.

* Expand Treasury Authority to integrate arbitrage rebate and yield restriction requirements.

What Revenue Raising Provisions Would Impact Communities?

The bill proposes $21.8 billion in revenue raising, including two major provisions impacting cities and towns:

* Permanent Extension of Limitation on Deductibility of State and Local Taxes: This provision would raise nearly $6.5 billion in new federal tax revenues over the next five years by permanently extending the limitations on itemized deductions enacted as part of the 1990 budget agreement.

The provision limits the deductibility of state and local income and property taxes for individuals and families with incomes (indexed) in excess of $105,250 annually. It has the effect of requiring individuals to pay taxes on income already withheld - in effect creating double taxation.

* Information Reporting on State and Local Tax Payments and Refunds: This provision would raise $155 million in new federal revenues over the next five years by mandating that state and local governments which impose real property taxes to report to individuals and the IRS.
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Title Annotation:includes related tax alternatives information; Senator Lloyd Bentsen
Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Aug 3, 1992
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