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Senate nears closure on tax plan; veto likely.

The Senate Finance Committee last week passed and sent to the full Senate a $57 billion tax bill which includes a number of municipal priorities. The full Senate expects to take up and pass the bill early this week, go to conference with the House, and send a compromise to President Bush by March 20th.

The bill, Bentsen I, was adopted 11-9 along straight party lines virtually guaranteeing a White House veto later this month.

Of all the major tax bill proposals, Bentsen I comes the closest to complying with the 1990 budget agreement and is the only one which would reduce, rather than increase the federal deficit next year.

It provides a permanent, middle income children's $300 tax credit; major tax subsidies and incentives for saving; a capital gains tax cut; and a number of provisions to make make it easier for individuals and small businesses to obtain health insurance--and to prevent disqualifications of individuals or families due to existing health problems. The bill includes modified versions of all the tax subsidies sought by President Bush. In order to comply with the budget law, it proposes to pay for the tax cuts by raising tax rates on the wealthiest Americans.

For cities and towns, the bill rejects the President's proposed $8.1 billion mandatory Medicare tax increase. It proposes an 18 month extension of the expiring municipal mortgage revenue bond program and rejects the HUD proposal to preempt municipal authority authority to issue such tax exempt bonds. It also proposes 18 month extensions of the other key expiring municipal priorities: small issue indutrial development bonds, and low income and targeted jobs tax credits. It includes expansion of the deduction for transit passes. It provides some simplification of the federal rules governing issuance of traditional public purpose tax exempt municipal bonds. And it increases incentives for banks to purchase notes and municipal bonds from small and medium sized cities.

Municipal Issues

Overall, Bentsen I, like the other tax proposals, would have a mixed impact on communities. It includes a number of provisions which would help cities and towns. Bentsen I:

[section] extends municipal authority to issue municipal mortgage revenue and small issue industrial development bonds from their current expiration date of June 30, 1992 to December 31, 1993. It also extends the expiring targeted jobs and low hncome housing tax credits for the same period.

[section] increases the incentives for banks to purchase municipal tax-exempt bonds to help medium sized cities. Under the current law, banks may deduct the cost of purchasing or carrying tax exempt bonds only if they are purchased from a city or town that expects to sell no more than $10 million annually in general obligation or revenue bonds. Under the change, banks could purchase from cities expecting to issue up to $25 million annually. In addition, in a key provision important to Maine and Texas municipalities, the provision would allow the bank to purchase bonds issued by a municipal bond pool--such as a state revolving loan fund--as long as all the borrowers met the $25 million limitation. The change would apply to governmental municipal bonds issued after December 31, 1992.

[section] excludes from income "qualified transportation fringe benefits," including transit passes or van pool costs provided by an employer, including a municipality, as long as the assistance does not exceed $60 per month, but would cap the exclusion for employer-provided parking benefits at $160 per month. The expansion of the transit benefits would be effective retroactive to January 1, 1992; the new limit on parking benefits would be effective on the date of enactment.

[section] includes a number of technical changes to simplify the issuance of municipal bonds by cities and towns, including an extension of the six-month exemption from the rebate requirement rules in certain cases, modification of the bona fide debt service rules, extension of the temporary period for a year for construction bonds where cities have spent 85 percent in the temporary period, and termination of the requirement that two bond issues from similar fund sources issued within the same 30-day period be treated as the same issue.

The bill contains a number of provisions unlikely to help communities;

[section] it restores fully deductible IRA's and creates new, backloaded Special IRA accounts--these savings incentives would reduce state income tax revenues, and over time, have a huge impact on the federal deficit. As structured, the Special IRA accounts would raise federal tax revenues in the first year according to committee estimates by providing incentives for individuals to cash out existing IRA's, pay taxes, and put them in the new Special IRA's--where, as long as the savings were held for 5 years, they would be forever exempt from federal taxes. This means that the revenue loss both to the federal government, and to the majority of states piggy-backed on the federal tax code, there would be a large and growing increase in the deficit.

The provision also creates an alternative to municipal tax-exempt bonds, offering both higher interest rates and the full faith and credit of the federal government--potentially forcing up interest costs for cities and towns.

[section] the bill provides a $5000 tax credit for first-time homebuyers which could be used only for the purchase of a new, rather than existing, home. The $1.5 billion subsidy would be directed at communities with new home construction and away from cities.

[section] the bill proposes to raise $3.7 billion through the permanent extension of the restrictions enacted in 1990 on the deductibility of state and local taxes.

Health care provisions

In addition to the tax changes and cuts, the bill includes a number of health care provisions supported by the administration. It would set federal standards for the regulation of private health insurance to make coverage more available and affordable to employers with less than 51 employees.

It would prohibit health insurers from refusing to offer health insurance to people deemed to present a fiduciary risk because of existing medical conditions like heart disease or diabetes.

Bentsen I would permit workers to change jobs without losing health insurance.


Although Bentsen I contains variations of all seven tax or economic growth initiatives sought by President Bush, no compromise between Congress and the White House appears possible and the tax bill is almost certain to be vetoed.

The outlook for any effort to write another tax bill is clouded by election year politics.

The President has made clear he will veto any tax bill that raises taxes--although he has not yet proposed to drop the federal tax increases he requested from the Congress on cities. The administration position is focused on cutting taxes for upper income families and using accounting measures--called "cruel accounting" by some Democrats--to claim compliance with the budget agreement. The White House tax proposal is projected by the Joint Tax Committee and Congressional Budget Office to increase the federal deficit by more than $40 billion over the next five years. The Democrats are focused on cutting taxes for middle income Americans, paying for it by increasing taxes on the wealthiest Americans.

For cities, the failure puts the expiring municipal priority provisions in jeopardy. The next opportunity to act is likely to come much later this year when the President will be forced to ask Congress to vote to increase the national debt ceiling.

Since 1985, the debt ceiling votes have been the vehicles which forced adoption of Gramm-Rudman I, Gramm-Rudman II, and the 1990 budget summit agreement. Each of those agreements has involved taxes, deficits, and disinvestment in the nation's communities.
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Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Mar 9, 1992
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