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Conflicting tax proposals head for Capitol Hill showdown.

The House of Representatives is set to vote on three major alternative tax bills affecting the nation's communities this week, while the Senate Finance Committee is scheduled to begin work on its own version as early as Thursday.

The different tax options could have significant direct and indirect impacts on communities as they struggle to recover from the long recession. All would affect the authority and ability of cities and towns to finance public infrastructure, housing, and economic development.

The While House has insisted that Congress pass and send to the President tax legislation by March 20 in order to help stimulate the economy out of the recession. Few economists believe any of the plans will help. Many believe they will hurt the economy.

The issue of whether to cut taxes or to reinvest in the nation's communities to help the nation out of recession and to make the nation more competitive has become one of the most pivotal issues in the Congress. The question of how to pay for any tax cut has proven especially difficult.

In the House, members will be asked to choose between the President's proposed tax cuts, a House Republican alternative, and a still-unprinted Democratic alternative. All three alternatives would erode state tax bases - likely leading to further state mandates on local governments and cuts in state aid to local governments - and increase the long term federal deficit and national debt.

The Democratic version includes a number of NLC priorities, including reducing some of the complex restrictions on the issuance of municipal tax exempt bonds, permanent extension of expiring municipal priorities, increased benefits for public transportation, and adoption of urban and rural enterprize zones.

The White House has vowed to veto the Democratic alternative, if it passes.

House Republicans and Democrats are almost certain to reject the President's proposed tax bill.

The House Republican version would have the most adverse impact of any of the proposals on the nation's cities. Moreover, unlike the President's and the Democrats' proposals, the House Republican one relies entirely on suspect accounting mechanisms in violation of the federal budget law.

Senate gets ready for action

After a Senate Democratic caucus to discuss tax legislation on Thursday afternoon, Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.) said the Democrats reached agreement to oppose using defense cuts to pay for tax cuts. The Senate Democrats apparently failed to reach agreement on whether to support a middle income tax cut--as proposed by President Bush and the House Democrats--or to dedicate those tens of billions of dollars to community reinvestment or deficit reduction. The President's middle income tax cuts would cost over $24 billion; the House Democratic temporary middle income tax cut would cost nearly $46 billion.

Local impacts

NLC Executive Director Don Borut wrote to each member of the House and each member of the Senate tax-writing committee to urge careful consideration of the impact of any federal tax cut on state and local economies and on the federal deficit.

Because over 40 states piggy back state tax laws on federal tax laws, federal tax cuts could immediately educe state revenues in the middle of a nationwide recession. Borut warned that:

"The actions state and local governments would be required to take in the form of tax increases and spending cuts ot offset these federal tax changes in order to balance their budgets would be more likely than not to exacerbate the national recession than to stimulate economic recovery."

Proposed cuts in the capital gains tax and incentives for savings would have the shrpest impact on state and local governments, as well as the most serious long term impacts on the federal debt. All three House tax altrnatives include capital gains tax cuts, and all three include new federal subsidies for savings incentives.

House alternatives

The $90 billion House Democratic proposal, or Rosty I, would:

[section] extend permanently municipal authority to issue mortgage revenue and small issue industrial development bonds, and low income housing and targeted jobs tax credits; and

[section] reduce a number of restrictions and mandates hampering the ability of smaller cities and towns to issue traditional public purpose tax exempt municipal bonds.

Rostly I includes a major, but temporary middle income tax cut, targeted capital gains tax cuts, and a corporate rate cut.

To offset the revenue loss to the federal government, Rosty I proposes $90 billion in tax increases over the next five years, mostly through restoring a higher rate on high income individuals and families, a surtax on millionaires, and a two-year extension of the current restrictions on the deductibility of state and local taxes. Rosty I rejects the proposed While House mandatory Medicare tax increases on state and local governments.

House Republicans rejected the President's tax proposals--objecting both to the $21 billion in tax increases and that the capital gains tax cut was not steep enough. They proposed their alternative, GOP I, as a short term substitute and dropped all offsetting tax increases, substituting instead a number of accounting provisions and optimistic economic assumptions.

The $31 billion Republican substitute includes no middle income tax cut; it proposes: a capital gains tax cut; a $5000 tax credit for first-time homebuyers; a modification to allow penalty-free withdrawals from IRA's for first-time homebuyers; passive loss relief; an investment tax allowance; simplication and modification of the alternative minimum tax depreciation; and provisions to subsidize real estate investment through pensions. It includes no provisions to extend the key expiring municipal priorities or to modify mandates on municipal bonds.

Rosty I and Municipal Bonds

Rosty I includes a number of provisions strongly supported by NLC. The proposal would make permanent the authority to issue mortgage revenue bonds and small-issue industrial development bonds, which are scheduled to expire June 30.

In addition, the measure contains a number of tax-exempt bond simplification provisions, including one that would raise the $5 million small-issuer exemption from the arbitage rebate requirement to $10 million. Another provision would eliminate the so-called 5 percent unrelated and disproprionate-use test.

Rosty I also includes other technical provisions affecting municipal finance, including:

[section] Expanding the six-month exemption from the rebate requirement to an issuer who has spent 95 percent of proceeds within that period. To be eligible for this exemption, the issuer must spend the other five percent within the next six months. Under current law, an issuer could only qualify of the six-month exemption if the lesser of 5 percent or $100,000 was left over six months;

[section] Easing requirements for bona fide debt service funds under the 1989 arbitage rebate relief law. Under that law, an issuer of governmental bonds is exempt from rebate if proceeds are spent within two years according to a specific schedule. The exemption does not apply to proceeds debt service funds from rebate if the issuer met all the requirements of the spending schedule;

[section] Automatically extending the temporary period for construction bonds for an additional year as long as the issuer has spent 85 percent of the proceeds of the issue and reasonably expects to spend the other 15 percent in the next year;

[section] Ending the requirement that two bond issues paid from substantially the same source of funds be treated as the same issue if they are issued within 31 days of each other. Current law has forced issuers to, for example, separate by 31 days a tax and revenue anticipation note from a capital financing because it would be impossible to treat them as one issue for rebate purposes.
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Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Feb 24, 1992
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