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Tax on cities may finance federal long-term care plan.

House and Senate Democratic leaders have introduced similar bills to provide long term health care for elderly and disabled Americans paid in large part through a direct tax on cities and towns. While the legislation, introduced earlier this month, is unlikely to be adopted this year, the proposal to impose a direct tax on the interest on traditional municipal bonds sets a grave precedent for state and local governments.

If enacted, the legislation is projected to cost $45 billion annually. While the Senate version is unclear with regard to financing, the House bill would raise the $45 billion from three sources:

[subsection] a 2.5 percent tax on unearned income (including interest on all state and local tax exempt municipal bonds);

[subsection] a payroll tax of 0.5 percent on employers (including cities and towns) and employees; and

[subsection] a reduction in the amount of estate taxes exempt from deferent taxation.

The Long-term Care and Family Security, HR 4848, was introduced by House Majority Leader Richard Gephardt (D-Mo.) and House Health and Environment Subcommittee Chairman Henry Waxman (D-Calif.) on April 9. Eleven Senate cosponsors, including Senate Majority Leader George Mitchell (D-Maine), Senate Labor and Human Resources Chairman Edward Kennedy (D-Mass.), and Sens. John Rockefeller (D-W.V.), David Pryor (D-Ark.) and Don Reigle (D-Mich.), introduced a similar bill the same day.

The legislation would create a new federal insurance program to provide nursing home care and in-home care for chronically ill and several disabled people of all ages. The insurance would pay for in-home care and up to six months of nursing home care, regardless of income. For longer periods, the bills' insurance provisions would protect up to $60,000 of the life savings of elderly persons and their spouses as well as their homes.

While few cities bear direct responsibility for long term health care, the House bill would have a double-financial mandate impact. Not only would it impose a direct tax on cities and towns as employers, but also it would impose the federal income tax on all interest earned on tax exempt municipal bonds.

The bill proposes a tax on unearned income--defined as all non-payroll income--including tax exempt municipal bond income. The tax, which would mark the first time the federal government had ever mandated a federal tax on state and local bonds, would force cities and towns to offer a higher interest rate to investors - paid for either through higher local taxes or user fees. The net impact would be to increase the cost to cities and towns of providing schools, hospitals, health care centers, and other public infrastructure improvements.

A previous effort by Congress and the White House to enact catastrophic health care for the elderly was overturned in the face of complaints that it was financed through a tax on the beneficiaries.
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Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Apr 27, 1992
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