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Budget's tax change proposals indicate mixed results for cities.

The administration budget requests $320.7 billion in tax increases and $54.7 billion in tax incentives over the next five years 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 and targeted jobs tax credits. The administration is expected to release shortly a proposal for new economic development tax exempt municipal bonds for distressed cities and towns, and removal of existing, costly obstacles to issuance of tax exempt municipal bonds.

The key city priorities the President requested include:

Reauthorizing retroactively 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 and targeted jobs tax credit programs.

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 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 proposed BTU tax could both reduce state and local sales and severance tax revenues and, because the tax, as proposed, provides no exemption for cities and towns, increase municipal gas and energy bills. The plan proposes to extend permanently the existing limit on the deductibility of state and local taxes.

The administration tax plan would have little impact on families earning less than $30,000 annually, where the increase in the Earned income Tax Credit (EITC) is expected to offset most of the BTU energy tax. For middle income residents, the change would be modest--about $200 more annually, mostly coming from the proposed energy tax. The bulk of the individual tax increases will fall on families earning more than $175,000 annually.

The administration tax plan proposes significant tax increases for businesses through higher rates, repeal of certain deductions, and the new BTU energy tax. The combination of tax hikes and new incentives favor small over larger businesses in communities, providing both a more attractive Investment Tax Credit (ITC), an exemption from the higher corporate income tax rate, and a capital gains tax cut.

The proposed BTU energy tax is a broad-based tax on the heat generated by an energy source, measured in British thermal units (BTUs). Coal, natural gas, and hydro-and nuclear-generated energy would be taxed at the rate of $0.257 per million BTUs, while oil would be taxed at a rate of $0.599 per million BTUs.

The tax would be phased in beginning in 1994 and would be fully implemented in 1997. The BTU tax would be collected at the source. It would provide a downstream credit for non-fuel use of energy such as when petroleum is-used as an input in the manufacture of plastics. The BTU tax impact on industries could vary widely. Manufacturing is one industry likely to bear the brunt of the tax.

Proposed Tax Hikes, Incentives

The major tax increases would include:

* raising individual tax rates to 36 percent for high income persous;

* an income surtax on persons earning over $250,000;

* closing loopholes;

* raising corporate tax rates;

* cutting deductions for lobbying lunches;

* eliminating the Medicare tax cap;

* increasing the amount of Social Security subject to taxes;


* a broad-based Btu tax.

The major tax incentives proposed in the budget include:

* an expanded Earned Income Tax Credit

* a targeted capital gains tax cut;

* an incremental investment tax credit;

* extensions of expired provisions;

* small business investment tax credit; and

* high speed rail bonds.
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Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Apr 19, 1993
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