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House unit may ease limits on local bond authority.

The House Ways and Means Committee began work last week on the President's deficit reduction and spending package and expects to begin focusing on the President's tax increases and incentives affecting cities and towns as early as this week.

Last week the committee adopted measures to change the threshold exemption level for domestic and election workers from the Social Security tax, but not for municipal elected or appointed officials.

Chairman Dan Rostenkowski (D-Ill.) said he expected the committee to successfully pass the Clinton tax changes as early as the end of next week, but anticipated changes in the BTU energy tax and investment tax credit. Other committee members expect to offer amendments to remove some of the costly limitations on municipal authority to issue traditional tax exempt bonds. Committee sources indicated the administration had still not completed work on its $5.8 billion enterprise zone plan.

The Clinton administration was expected to send the committee the details of its massive tax package late last week. For cities, the bill will include key provisions to restore and extend permanently priority municipal tax programs, to create new tools to leverage capital for economic development in the most distressed cities and towns, and to provide revenue to help reduce the deficit.


The administration tax plan calls for $266 billion in tax increases and $66 billion in tax incentives over the next four years to reduce the federal deficit and provide incentives to stimulate the economy. It includes, as part of the $30 billion economic stimulus plan, municipal aid tax legislation to permanently extend municipal mortgage and small issue development revenue bonds, low income housing and targeted jobs tax credits, and new economic development tax exempt bonds for distressed cities and towns.

The proposal also includes language for the removal of some existing, costly obstacles to issuance of tax exempt municipal bonds, but the administration indicated it would not oppose expected efforts in the Ways and Means Committee to provide for greater relief.

A Big Package: Reconciliation

The administration tax and entitlement package are part of a long term investment and deficit reduction plan calling for $160 billion in longer term investments, including $136 billion in new spending and over $24 bullion for private sector tax incentives over the next four years to combined with the spending cats and investments from 12 other major committees in the Congress to be combined into one, massive package--called reconciliation legislation. The budget resolution set a deadline of May 14 for all House committees to complete action. Senate committees have until June 18.

To reduce the federal deficit, the President proposed more than $266 billion in federal tax increases and over $200 billion in spending cuts. The administration projects that the combination of tax increases, spending cuts, and investment would reduce the 1997 federal deficit by about $140 billion to $206.5 billion.

The greatest contributor to deficit reduction under the President's plan would be federal tax increases. The major tax increases would include:

* raising individual tax rates for high income persons

* an income surtax

* closing loopholes

* raising corporate taxes

* 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 key tax incentives and costs are:

* extension of employer provided education aid--$3 billion

* extension of targeted jobs tax credits--$1.5 billion

* youth apprenticeship credit--$.5 billion

* temporary investment tax credit--$28 billion

* extend research tax credit permanently--$10 billion

* high speed rail tax exempt municipal bonds--$.05 billion

* enterprise zones--$4.3 billion

* extend small issue idbs--$.2 billion

* expand the earned income tax credit--$29 billion

* extend municipal mortgage bonds permanently--$.8 billion

* extend low income housing tax credit--$4.4 billion

Social Security

A Ways and Means subcommittee began work on the reconciliation bill last week when it voted to extend the current .8 percent unemployment insurance tax on cities and other employers and to make changes in the so-called "granny tax" on domestics and increase the exemption threshold for election workers. The combination of the extension and Social Security changes are projected to produce a net deficit cut of $1.4 billion. The change in coverage for election workers would increase the current tax exclusion from $ 1 00 to $ 1 000 annually.

A Distressed Cities and Towns Enterprise Zone Program

The committee expects the on to propose a two-tiered urban and rural enterprise zone program which would authorize every distressed city and town to issue a new kind of tax exempt economic development bond. There would be incentives for local banks to purchase the bonds, and the bonds would count only 50 percent against the state private activity volume cap.

Reducing Municipal Bond Mandates

The administration is expected to propose a number of municipal bond simplification provisions: The two most important would increase the current $10 million limit on bank deductibility to $20 million - significantly increasing the number of communities eligible to benefit from incentives to banks to purchase and hold their tax exempt bonds--and double the exemption from the arbitrage and rebate mandates from $5 million to $ 1 0 million, which could significantly reduce the cost for many more smaller communities to issue traditional general obligation and revenue municipal bonds.

Reps. William Coyne (D-Pa.), Benjamin Cardin (D-Md.), Jim McDermott (D-Wash.), John Lewis (D-Ga.), Lewis Payne (D-Va), and Wiffiarn Jefferson (D-La.) were all working on efforts to broaden municipal refief as the Weekly went to press. Those efforts are expected to include efforts to change the definition of public purpose bonds, modify the arbitrage and rebate mandates on local governments, restore incentives for banks to purchase municipal debt, and index state volume caps.

Chicago Mayor Richard Daley wrote to Rostenkowski on Wednesday urging the Chairman's support for inclusion of such a municipal package in the bill to improve cities' ability to finance infrastructure improvements. The recommendations are similar to those recommended by the governors, state legislators, counties, mayors and NLC to the White House last month.

Municipal Impact

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 sharp increase in income tax rates would make tax exempt municipal bonds--especially traditional governmental bonds, which are exempt from the higher alternative minimum tax--more attractive to investors, potentially reducing the cost of borrowing short and long term for cities.

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). As proposed, it would have a significant, adverse impact on many cities and towns--imposing a new federal mandate of as much as six to seven percent of the municipal budget. It would, moreover, set a precedent of the federal government imposing a direct tax on state and local governments, forcing cities and towns to either pass the mandates on in the form of higher city taxes or in reduced services.

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.
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Title Annotation:House Ways and Means Committee
Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:May 3, 1993
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