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Commission plan to balance budget would imperil municipal finance.

The final report of a bipartisan public-private national commission headed by Sens. Sam Nunn (D-Ga.) and Pete Domenici (R-N.M.) is calling for a bold plan to balance the federal budget in 10 years, invest $260 billion in domestic public and human infrastructure; completely replace the nation's current tax system with a consumption tax which would likely end municipal bonds; and eliminate federal gridlock by restructuring the executive and and Congressional branches.

For the nation's cities, adoption of the recommendations would mean huge new burdens and would change forever municipal finance.

Commission member Isabel Sawhill, a senior member of the Urban Institute, noted the report calls for $1 trillion in domestic spending cuts, but gives no sense of how painful such cuts would be, much less what choices that would force upon the nation.

Nunn and Domenici announced the recommendations of the Strengthening of America Commission on September 30, calling their proposal an action plan to address the challenges of the future:

Along with our colleagues on the Commission, we offer an action plan for growth in this first report that addresses three critical areas: fiscal and tax policy; public and private investments in human resources, including education and training, science and technology, management, and infrastructure; and breaking the gridlock in Washington so that the president and the Congress can better make sound, long-term economic policy."

Stating that they believe fundamental change in America is required, urgent and possible; the two Senators said that they hoped their plan would offer thoughtful people a place to start. But they said the federal government alone could not solve all of the problems: "there is much that local communities, schools, and parents must do."

Ambassador David Abshire, the president of the Center for Strategic and International Studies, had invited the two mayors and senators as well as 56 other corporate and public leaders to develop the report. In his preface, Abshire wrote:

"We are most vulnerable not on the Russian steppes or in the Persian Gulf, but in our factories, our classrooms, and our halls of government. It is in these places that we will either maintain or lose the strength to influence world affairs for the forseeable future.

"There is more in our house that needs to be put in order besides issues concerning production and the economy. The tension that boiled over in Los Angeles is just a symptom of a festering unrest.

"We need to learn from other societies that loyalty to one another and mutual responsibility are elements of competitiveness as well as of compassion. We build great freeways, but we cannot simply drive past our neighborhoods that have been allowed to decay. Woven into any program to strengthen America must be strategies to help all our citizens participate fully and effectively in our economic life."

Balanced Budget Plan

The Nunn-Domenici plan calls for $2 trillion in spending cuts and new tax increases over the next decade. Key elements of the deficit reduction plan include: * cutting non-Social Security mandatory spending programs, such as Medicare and Medicaid by $660 billion; * cutting defense spending by $290 billion from current projected spending; * increasing foreign aid spending by only 20 percent, saving $21 billion compared to current projected spending; and * cutting domestic discretionary spending by $243 billion from current projected levels.

Sawhill noted that cuts of such enormous size would inflict real pain on the economy, especially on lower income families, but that the report failed to even begin to point out where and how savings of such size could be achieved.

For cities, the domestic spending cuts would actually be about $400 billion, because the plan recommends $160 billion in program cuts and eliminations of HUD, EDA, and surface transportation programs to pay for increased spending for education, children, research and development, and technology.

Seattle Mayor Norm Rice and Louisville Mayor Jerry Abramson took part in the commission's work on the report.

Mayor Abramson, in a separate opinion filed with the report, wrote that "it [would be] a grave mistake to ignore the vital role cities play as the economic engines of our nation and the important role the federal government has in supporting such investment. A strategy built around investment designed to generate economic productivity should enhance investment in the nation's cities, not reduce it."

Endowment for the Future

The report calls not just for cuts in the fiscal deficit, but also for reductions in the nation's human and physical deficits. It recommends the creation of a $160 billion Endowment for the Future" to improve human resources and increasing spending on public infrastructure by $100 billion.

Noting that the key component of a public investment strategy is investment in human resources, the commission recommended major changes in education, training, and dedication of the endowment for investment in children's programs such as Head Start.

At the same time, it called for increased energy taxes or user fees to finance $100 billion in increased spending on roads, bridges, airports, and tunnels over the next decade. And the report urged the creation of a new kind of tax exempt municipal bond, infrastructure bonds, to help finance the cost of compliance with unfunded federal environmental mandates. According to the report the $100 billion in new taxes or fees could be collected either by raising the federal gas tax by 11.5 cents a gallon or imposing a $5 per barrel oil import fee.

Consumption Tax

In the section with the greatest potential impact on municipal finance, the commission recommended abolishing the current income tax system and replacing it with a progressive consumption-based income tax system that would exempt all savings and investment from taxation.

Basically, what the new tax system would do is tax just that portion of any family's or corporation's income that was used for spending or consumption. Any cash flow, earnings, interest, or income used for savings, investment or capital formation would be tax exempt. The proposal would eliminate any incentive for any family, business, or individual to purchase or hold tax exempt municipal bonds.

Last year states and local governments issued nearly $200 billion in long term tax exempt municipal bonds to fund everything from education to infrastructure to jails and hospitals. The virtual elimination of tax exempt municipal finance would have extraordinary consequences for cities and towns.

The commission apparently never discussed this issue; it did not offer any alternatives.

Overall the new tax system would be drafted so as to increase federal taxes by an additional $376 billion over the decade, so that, combined with the spending cuts, the federal budget would balance.

Eliminate Gridlock

Finally the report recommends changes in both the executive and congressional branches. The commission urged creation of a National Economic Council, comparable to the National Security Council, to coordinate national domestic policy. It urged creation of a House-Senate Joint Budget Committee to replace the existing House and Senate Budget Committees.
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Title Annotation:The Strengthening of America Commission
Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Oct 19, 1992
Previous Article:Joint statement on entitlement reform issued by NLC, NACo, NCSL.
Next Article:Chattanooga mayor promotes affordable housing.

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