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President signs tax bill: new regulations and burdens on state and local governments: several portions of the new Tax Increase Prevention and Reconciliation Act of 2005 significantly impact state and local governments.

On May 17, President Bush signed the $70 billion Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). The tax bill was designed to provide a short-term solution to the increasing application of the alternative minimum tax and extend for two years, until 2010, the dividend and capital gains tax cuts that were enacted in the 2001 legislation. Also included in the bill were a handful of provisions that significantly impact state and local governments, which are highlighted below.


At the last minute, a 3 percent withholding and annual reporting requirement for federal, state, and local government contractors was included in the bill. This provision could have a significant financial and administrative impact on many large governments. The legislation states that beginning on January 1, 2011, governments that spend more than $100 million per year on goods and services will need to withhold 3 percent of the payments made to vendors and contractors, and remit that 3 percent to the federal government, similar to the manner in which payroll taxes are administered. The withholding requirement constitutes an unfunded mandate on state and local governments. The Congressional Budget Office estimated the cost to state and local governments for administering the provision would be $62 million (in 2006 dollars) per year.

This provision was not included in the original tax bills passed by the House or Senate, but instead was included in the conference meetings held between the leaders of the two chambers and placed in the final bill at the eleventh hour, one day before the House voted on final passage of the final bill. There are some exceptions to the rule including real property and payments in connection with a public assistance or public welfare program. Due to the vagueness of the legislative language, we have already begun to inquire about these exceptions, and other provisions under this heading that are confusing.

Senator Larry Craig (R-Idaho) introduced the Withholding Tax Relief Act of 2006, S. 2821, that would repeal this provision. The GFOA, along with the National Association of Counties and the National League of Cities, sent a letter to the Senator supporting this legislation. A copy of the letter and a link to the legislation may be found on GFOA's Web site.

As we combat this provision, the GFOA and other local organizations are asking their members for information to demonstrate to Congress the significant cost and administrative impact this new requirement will have on state and local governments. Additionally, we will work with colleagues in the private sector to create a coalition to repeal or substantially water down this provision before it becomes effective. As we meet with members of Congress and officials at the Department of the Treasury, we would greatly appreciate your thoughts on this issue--how it will impact your jurisdiction, the concerns with regard to vendor relations as well as the additional administrative time and costs that it would take to implement this law within your finance office. Please submit any information to


As expected, Congress acted to place new requirements on pooled financings. While the final legislation included a significant change from the original proposal, the following requirements will be placed on pooled financings completed after May 17, 2006:

1. For pools other than state revolving funds, 30 percent of the ultimate borrowers must be identified prior to bond issuance.

2. All pools must lend 30 percent of the net bond proceeds in the first year and 95 percent by the end of three years--or those outstanding bonds will need to be redeemed.

3. The arbitrage rebate small issuer exception for entities that host a pool is eliminated.

4. The provisions are effective for bonds issued after May 17, 2006.

The GFOA and others will be working with the Department of the Treasury on the forthcoming regulations, specifically with regard to the definition and parameters of the first year 30 percent lending requirement.


A new section was added to the conference report that considerably impacts jurisdictions that in the past have entered into SILO (sale-in-lease-out) and LILO (lease-in-lease-out) agreements. The law adds a new 35 percent excise tax on state and local governments, political subdivisions, and non-profit organizations that participate or have participated in "prohibited tax shelter transactions" (also known as "listed transactions"). The provision applies to past transactions, although the excise tax will only apply to the greater of 75 percent of the proceeds received by the tax-exempt entity in the taxable year that are attributable to the prohibited tax shelter transaction or the tax-exempt entity's net income for the year that is attributable to that transaction after May 17, 2006. This provision is especially disturbing since prior to the 2004 JOBS ACT, SILO and LILO transactions were allowed (not labled as "listed transactions"), and even favored by the federal government. A small number of SILO deals that were grandfathered in the 2004 Act remain grandfathered under TIPRA. Additionally, governmental entities that participate in these transactions must file a yearly report with the IRS and a tax on "entity managers" who approve prohibited tax shelter transactions after May 18, 2006, will also be applied.

Even more troubling is the language of the provision that allows the IRS to determine future "listed transactions" without challenge, and have the 35 percent excise tax apply. This could potentially impact various types of financings that local and state governments use, including bond transactions. The GFOA is seeking clarification from Congress and the Department of the Treasury about this provision and additional information may be found on the GFOA's Web site.


A provision that has been discussed for nearly a year calling for all tax-exempt bond interest to be reported to the IRS, similar to the way taxable investments are reported, was also exacted in the TIPRA. Unlike the original proposal that would have placed the reporting responsibility on issuers, the legislation places the responsibility of the reporting on the broker/bank custodian community, similar to the way in which taxable interest is reported to the IRS. The effective date is retroactive, beginning January 1,2006, forcing many technical issues to be determined by Department of the Treasury. Meetings with Treasury are underway and the issuer community is working closely with The Bond Market Association and the American Bankers Association to ensure easy implementation of the provisions--for instance using the current 1099 form, with an additional box added regarding tax-exempt interest, rather than implementing a new form, and minimizing any additional costs to the issuer community It will also be important to ensure that the requirement is for the aggregate amount of tax-exempt interest, rather than a listing of each bond by CUSIP number.

As with all Washington activities, please do not hesitate to contact the GFOA's Federal Liaison Center if you have any questions, comments or suggestions regarding congressional, regulatory, or judicial activities.

Telecommunications Reform Efforts Moving Forward In Congress

Despite strong opposition from local governments, the House of Representatives approved the Communications Opportunity, Promotion, and Enhancement Act of 2006 (COPE, H.R. 5252), sponsored by Representatives Joe Barton (R-Texas) and Bobby Rush (D-Illinois) in June. If it were to become law, this bill would "federalize" local government video/cable franchising, limit the benefits of broadband-video competition to a few welt-to-do neighborhoods, and undermine the ability of local governments to protect consumers and manage public rights-of-way.

On the Senate side, the Senate Commerce Committee, chaired by Senator Ted Stevens (R-Alaska), also approved its version of telecommunications reform legislation, Advanced Telecommunications and Opportunity Reform Act, in late June. While the video franchising component of the legislation is not ideal from a local government perspective, the legislation has improved since its original introduction, and the franchising provisions are more favorable to state and local governments than the House bill. The legislation approved by the Senate Commerce Committee clarifies a timeframe for action by local governments on new video franchises (90 days); preserves local government control and authority to manage their rights-of-ways; ensures that the courts, rather than the Federal Communications Commission (FCC), have jurisdiction over rights-of-way disputes; and protects local auditing authority.

Unfortunately, the committee adopted amendments that preempt local taxing authority strongly opposed by local governments (these provisions are not part of the House bill). The first, offered by Senator George Allen (R-Virginia), makes permanent the Internet Tax Freedom Act, which prohibits local governments from levying any tax or fee on Internet access, and phases out the previous grandfather for any such taxes currently in place. The second, offered by Senator John McCain (R-Arizona), would prohibit any new state and local government taxes on wireless (cell) phones for the next three years.

At press time, it was unclear when and if Senator Stevens could garner enough votes to have his legislation considered and ultimately approved by the Senate. The GFOA urges its members to check the association's Web site,, where updated information will be posted about the status of both the House and Senate telecommunications reform legislation, and what messages GFOA members should deliver to their congressional delegations.

SUSAN GAFFNEY is director and BARRIE TABIN BERGER is assistant director of the GFOA's Federal Liaison Center in Washington, D.C.
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Title Annotation:Federal Focus
Author:Gaffney, Susan; Berger, Barrie Tabin
Publication:Government Finance Review
Date:Aug 1, 2006
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