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Tax cuts will come at expense of cities.

In his 2000 page budget to Congress, the President proposed a massive package of tax subsidies to help the nation recover from the recession and to provide incentives for long term growth and savings. The President proposed to pay for the tax cuts through a combination of deep cuts in domestic programs, mandate tax increases on cities and towns, accounting changes and assumptions, and shifting deficits and debt from the present into the future.

The White House made clear that if Congress once again rejected the proposed cuts in entitlement programs--as it did by an overwhelming, bipartisan response last year--it would be willing to renegotiate the 1990 budget agreement to transfer cuts in defense spending to pay for the tax cuts.

The White House also made clear, however, that its price for any such renegotiation would be even more severe restrictions on federal investment in American communities. The budget documents indicate that the restrictions would include extending the life of the "firewall" in the current budget agreement which prohibits defense savings from being used for domestic investment. The administration has indicated it would oppose allowing the firewall to self-destruct as is currently scheduled effective October 1, 1993.

The tax requests could have significant impacts on the nation's communities, both directly and indirectly--and both positive and negative. The budget requests extensions of NLC-supported provisions and action on urban enterprise legislation; it proposes $7.9 billion in mandatory Medicare taxes on state and local governments and their employees.

The tax proposals would have many other impacts. Not only would they come at the expense of direct investment in the nation's cities and towns for human and physical infrastructure, but also they would impact both state and local revenues.

In reducing the federal revenues base, they would erode state and local revenue bases whose tax codes are tied to that of the federal government and increase the cost to cities and towns of borrowing.

Operation Tax Cut Storm

The President's request for Congress to act on the first of two major tax bills by March 20th has the potential to set off a tax bidding war in the Congress--as Democrats and Republicans strive to see which side an promise the most tax breaks in a federal election year.

A similar bidding war in 1981 led to massive increases in the federal deficit and national debt, in turn leading to reductions in federal assistance to the nation's communities of nearly 75 percent.

Under the short term proposal, the President indicated he would be taking immediate executive action to change federal income tax withholding effective next month to reduce withholding in 1992 by about $25 billion. The proposal is projected to increase the federal deficit by about $19 billion to an estimated, record $399 billion.

The President asked Congress to act by March 20th on a multibillion tax subsidy package to stimulate the economy:

[Section] changes in the alternative minimum tax--these would simplify depreciation for businesses at a cost of $1.6 billion;

[Section] a 15 percent investment tax allowance--the most expensive short term proposal would encourage the purchase of new equipment by permitting companies to accelerate depreciation into the early years;

[Section] increased tax subsidies for passive real estate losses--this would provide $2.4 billion in subsidies for real estate development activity;

[Section] modified rules to eliminate penalties for IRA withdrawals used for first-time homebuyers--this $1.5 billion provision would make IRA accounts more flexible, permitting the purchase of homes for first-time homebuyers;

[Section] a $5000 tax credit for first-time homebuyers--this $5.1 billion program would allow first-time homebuyers to take a $5000 credit over the next two years; and

[Section] a cut in the capital gains rate to a maximum of 15.4 percent--this provision, certain to be the most contentious, would reverse the 1986 tax reform act and restore federal tax subsidies for long term investment. According to the non-partisan Joint Tax Committee, it would significantly increase the deficit and primarily benefit families with annual earnings in excess of $200,000. According to the Treasury it would primarily benefit Americans earning less than $60,000 annually and increase federal revenues to offset some of the other tax cuts.

The budget also called for extension of expiring unemployment benefits. The extension is expected to cost $4.4 billion according to the White House.

Long Term: Economic Growth and Savings Incentives

As part of a second tax package, not focused on consumption, but long term growth, investment, and savings the budget proposes:

[Section] establishment of flexible individual retirement accounts (FIRAs)--this program would permit families with annual incomes of up to $120,000 annually to set up up to two tax free accounts as long as the deposits were held for at least 7 years. According to the Congressional Research Service the new accounts would compete directly against tax exempt municipal bonds, forcing cities and towns to pay higher interest rates to borrow for public infrastructure investment and municipal services and programs.

The new program would allow individuals and families to take savings out of current IRA accounts without penalty, but paying federal taxes, and transfer them to the new FIRA accounts. This would have the affect of "backloading"--that is increasing revenues over the short term, but creating huge increases in the federal deficit in the outyears--in effect borrowing from the future to pay for the present;

[Section] an increase in the personal exemption--this $23.9 billion proposal is the centerpiece of the administration's "middle income tax cut" proposal. It would increase the personal exemption by $500 per child and index the exemption, providing no benefit for low income families.

[Section] a $7.9 billion permanent extension of the expiring research and development tax credits;

[Section] an 18 month extension of the expiring, NLC-supported municipal mortgage revenue bond, low income housing, and targeted jobs tax credit programs at a cost of $2.7 billion;

[Section] an expansion of the public transportation exclusion--this provision would increase the amount of employer-provided (including cities) transit pass expense that may be excluded from an employee's income from $21 to $60 per month;

[Section] reformation of the nation's health care system. The President said he would be proposing tax credits of up to $3750 per family for a health care tax credit, but details of his health care legislative proposal would not be available until this month, nor any of the details of how to pay for it; and

[Section] deductibility of interest on student loans.

Pay or Play

Under the 1990 budget agreement, any tax cuts must be paid for on a pay-as-you-go basis--either by offsetting tax increases, or by offsetting cuts in entitlement programs such as Medicare or Medicaid.

The administration's budget proposes to stay within the budget agreement through:

[Section] mandatory Medicare tax increases on state and local governments;

[Section] using a different accounting method and "backloading" budget practices on capital gains and the new FIRA savings proposals;

[Section] proposing the use of accrual versus cash accounting to claim significant budget reductions;

[Section] assuming significant, but uncertain budget savings from changing banking laws; and

[Section] proposing $13.9 billion in savings in the non-needs-tested Medicare entitlement program by moving it towards need testing by forcing high income beneficiaries to pay a higher percent of their Part B premiums.
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Title Annotation:includes related article on block grant programs
Author:Shafroth, Frank; Peterson, Doug
Publication:Nation's Cities Weekly
Date:Feb 3, 1992
Previous Article:In focus: a time for extraordinary leadership.
Next Article:Small city programs hit hard by budget.

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