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Analysis of key provisions of the president's economic recovery plan.

The President last Tuesday signed the 1800 page economic recovery and deficit reduction bill, HR 2264, into law. As enacted, the new law is expected to reduce the federal deficit by about $496 billion over the next five years, $255 billion from spending cuts, and $241 billion from tax increases. The reduction in the deficit is expected to level off the growth in the federal deficit, but to have little impact on the rate of growth of the national debt.

The law will not only reduce the deficit, but also significantly alter the nation's budget priorities. While the bill calls for net reductions in federal entitlement spending, it actually calls for a significant increase in such spending for families falling below the poverty level. While it calls for large tax increases for high income persons, it provides tax relief for the lowest income families.

The new law will provide a number of economic incentives, including many directly and indirectly affecting the nation's cities and towns. But the spending cuts and many of the tax changes will impact the way cities do business.

Following is a brief analysis of some of the key elements for municipl officials:

Taxes and Revenues

The new law raises $268 billion in taxes over the next five years, but provides $29 billion in tax incentives to reduce the federal deficit and provide, incentives to stimulate the economy. It includes municipal aid tax legislation to permanently reauthorize and extend municipal mortgage and small issue development revenue bonds, and low income housing tax credits. It includes a proposal for new economic development tax exempt municipal bonds for distressed cities and towns, and $1 billion in new spending to go to states for programs in the most severely distressed cities and towns.

The major tax increases include:

* raising individual tax rates to 36 percent for high income persons - $115.1 billion

* closing loopholes - $4.6 billion

* raising corporate tax rates - $24.2 billion

* cutting deductions for lobbying lunches - $15.3 billion

* elliminating the Medicare tax cap - $29.2 billion

* increasing the amount of Social Security subject to taxes - $24.6 billion

* a 4.3 cent gas tax increase - $23.4 billion

The major tax incentives proposed in the budget include:

* an expanded Earned Income Tax Credit - $20.8 billion

* extensions of expired provisions - $12.4 billion * high speed municipal tax exempt rail bonds - less than $1 billion

* empowerment and enterprise zones - $3.5 billion

The key city priorities include:

Municipal Priority Tax Extenders

Reauthorizing retroactively to June 30, 1992, and permanently extending the expired municipal authority to issue tax exempt municipal mortgage revenue and small issue industrial development bonds, reauthorizing and extending permanently the low income housing tax credit program. The law would change the low income housing tax credit program to permit a greater credit (70 percent of present value) for property using HOME funds if 40 percent of the residents have incomes no greater than 50 percent of median income. The new law would retroactively reauthorize the targeted jobs tax credit program and extend it until December 30, 1994.

Enterprise & Empowerment Zones

The new law authorizes, effective next January, the selection of nine empowerment (six urban and three rural, with one of the urban zones reserved for a city with a population of 500,000 or less) and 95 enterprise zones (65 urban and 30 rural). The urban zones will be selected by HUD Secretary Henry Cisneros, the rural ones by Agriculture Secretary Michael Espy. Designations must be made between now and 1996, and are good for 10 years. There is no minimum population limit for any zone, but there is a maximum of 200,000 or the greater of 50,000 or 10 percent of the population of the largest city in the zone for urban areas; 30,000 is the population ceiling in rural areas. Urban zones may not exceed 20 square miles, rural areas 1000 square miles.

Eligibility: In order to be selected, an area must be nominated by one or more local governments and the state or states within which the zone is located, and the state and city or town must provide written assurances they will implement a strategic plan that:

* describes the coordinated economic, human, community and physical development plan for the area,

* describes the involvement of the community and municipal institutions as full partners in developing and implementing the plan,

* identifies the city, state, and private resources,

* identifies the method the city will use to measure the success of the plan,

* rejects any action to lure businesses from outside the zone into the zone, except as an expansion, and

* includes any other information required by the federal government.

In order to be eligible, an urban zone may contain no more than three non-contiguous parcels, and the zone must be an area of pervasive poverty, unemployment and general distress. Poverty rates must average 20 percent, with 25 percent for at least 90 percent of the area and 35 percent for at least 50 percent of the zone. Central business districts may be included only if the poverty rate exceeds 35 percent for an empowerment zone and 30 percent for an enterprise zone. The law does include special provisions for census tracts with little or no population.

The benefits would include:

* New municipal bonds: Cities with either empowerment or enterprise zones would be authorized to issue up to $3 million worth of tax exempt bonds for a qualified enterprise zone business, including for the purchase of land and existing property. The bonds would be similar to small issue industrial development bonds, but not limited to manufacturing facilities. As enacted, the law includes no incentives for local banks to invest as partners, nor any exemption from the state private activity volume cap.

* Wage credits: In empowerment zones only, the new law permits employers (but not cities or towns) to take a 20 percent, non-refundable wage credit against income tax liability against up to the first $15,000 in wages and training expenses for employees who are: zone residents, perform substantially all of their work in the zone, and have been employed for at least 90 days.

* Expensing: In empowerment zones only, the law will permit owners of qualified zone businesses to increase expensing to the lesser of $20,000 or the cost of the qualified zone property placed in service during the year.

A qualifying business is one which derives 80 percent of its income from an empowerment or enterprise zone, substantially all of its property and services are located and provided within the zone, and 35 percent of its employees are zone residents.

* Funding: The new law provides $1 billion in new funding to states for social service block grants for the zones, $720 million to be targeted to the nine empowerment zones and $280 million to the 95 enterprise zones. States are required to submit a plan which includes a detailed description of what they propose to fund in the area developed in cooperation with the city or town with jurisdiction over the zone. The state must use the grants for social services aimed at achieving self-support, reduction of dependency, or helping families and children. Direct grants to cities or towns are not permitted; infrastructure grants are not eligible purposes.

States may provide grants to for-profit or non-profits within the city or town for job training related to housing construction or after school activities, to fund drug and alcoholic prevention and treatment programs for pregnant women and children, or to fund community and economic development or homeless services.

* Community Development Corporations (CDCS): The law would permit the HUD Secretary to designate up to 20 community development corporations for which cash contributions would be eligible for an annual five percent credit up to a limit of $2 million annually per CDC. CDCs are tax-exempt corporations whose principal purposes include promoting employment and business opportunities.

* Specialized Small Business Investment Company (SSBIC): The law will permit individual or corporate investors to defer the capital gain from the sale of publicly traded stock if the gains are reinvested in equity of an SSBIC.

The tax changes proposed by the administration would impact virtually every citizen and every business. The changes would be mixed for local governments. The increased individual and corporate taxes (it would raise the top tax rate to individuals with taxable income in excess of $110,000 annually and families with $140,000) would increase revenue in those states which piggyback their income tax on the federal Internal Revenue Code, but would reduce revenue in states like Alabama which permit unlimited deductibility of federal income taxes. The higher individual taxes could increase the attractiveness of municipal bonds, helping to lower borrowing costs for cities and towns. The plan proposes to extend permanently the existing limit on the deductibility of state and local taxes.

The individual and corporate tax increases are retroactive to last January 1. For cities with affected employees (because of combined family income), the law does not require any change in the withholding rate until next year. The lifting of the cap on Medicare becomes effective January 1, 1994, so that all cities will have to adjust withholding effective next January.

The tax plan will benefit families earnings less than $30,000 annually effective next January 1st, expanding the Earned Income Tax Credit (EITC) by over $20 billion. The change is expected to mean that any family with two children where the head of household works full time would not fall below the federal poverty level. The tax credit reduces the taxes of low income persons and is refundable.

It would mean, for example, that a single mother with two children in rental housing in a city earning $19,000 annually would see her federal income tax liability drop from $577 this year to $6 next year. For middle income families in cities, the only tax change expected to have any impact will be the 4.3 cent gas tax, scheduled to go into effect on October 1, 1993. The bulk of the individual tax increases will fall on families earning more than $175,000 annually.

The tax plan includes tax increases for businesses through higher rates and repeal of certain deductions, but the rate increase is expected to impact only larger corporations with high profits and to provide a capital gains tax break for small businesses. The combination of tax hikes and new incentives favor small over larger businesses in communities, providing both a more attractive capital gains tax break and an exemption from the higher corporate income tax rate.


The bill achieves major spending cuts in discretionary spending, cuts in federal entitlement spending, and savings from the reduced costs of paying interest on the national debt. Some of the spending cuts are offset by increases, primarily to benefit children and families.

Discretionary: The greatest spending savings in the bill come from the imposition of a freeze on discretionary spending over the next five years. Overall spending on defense, domestic, and foreign aid programs subject to annual review, such as the Community Development Block Grant (CDBG) and transportation programs, would be frozen at current levels. The freeze will put all city programs in a tighter and tighter vise, as any new program or increase in an existing program will have to come at the expense of another program.

Entitlement: The new law cuts the growth in federal entitlement or automatic spending by more than $100 billion over the five year period, with the biggest cuts coming in:

* Medicare - $55.8 billion

* Delayed cost-of-living adjustments government retirees - $11.8 billion

* Medicaid - $7 billion

* Agriculture - $3 billion

* Student Loans - $4.3 billion

Increases: In addition to the $1 billion in State block grants for empowerment and enterprise zones in cities and towns, the new law would increase federal spending to ease eligibility requirements for the food stamp program, create a new family preservation program, and provide free childhood immunizations for uninsured children. The new family preservation program is a modified new entitlement program intended to permit states and local governments to intervene before a child is forced into a foster home.


House and Senate conferees dropped an NLC-opposed provision which would have mandated state and local tax subsidies for certain telecommunications firms. The provision could have significantly reduced the ability of cities to collect hundreds of millions of dollars worth of property taxes from cellular companies in at least 32 states. The provision, section 408 of the bill, would have restricted the ability to impose property taxes on FCC license holders, in effect denying authority to assess such property at fair market values. It would have changed current federal law to preempt state and municipal authority to treat a license or permit issued by the FCC as property for tax purposes.

The provisions were added in both the House and Senate without any hearings or opportunity for affected states and local governments to testify.

House and Senate Agriculture conferees also dropped n NLC-opposed compromise proposal which would have preempted - effective February 1, 1994, or prospectively - state law for cities that provide electric service, by giving unprecented federal rights and protection, overriding municipal condemnation and annexation authority and freezing coops into existing service territories. In the so-called "compromise" version, the measure would not only have prohibited condemnation, it would have prohibited the franchising of another utility to compete for new customers in an annexed area and would have kept municipalities from collecting a franchise or license fee from a cooperative utility doing business within municipal boundaries.
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Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Aug 16, 1993
Previous Article:Spending bills for FY94 advance toward fall passage.
Next Article:Get ready for NLC's 'Cities in Action.' (National League of Cities)(includes related conference and registration information)

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