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Taxes workshop discusses ways to leverage development capital.

Kathy Morris, the vice chair of NLC's Finance, Administration and Intergovernmental Relations Policy Committee and mayor of San Marcos, Tex., moderated a legislative workshop on Taxes and Cities during the Congressional Cities Conference where she urged NLC efforts 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.

NLC supports saving and investment over consumption in setting tax policy and urges recognition that all levels of government serve the same people.


The first panelist, Mitch Rappaport, an Attorney-Advisor in the Office of Tax Policy of the Treasury, provided background about the tax changes in Presi-1 dent Clinton's economic recovery plan that Congress will consider this year. The administration plan calls for $266 billion in tax increases and $66 billion in tax cuts 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, new economic development tax exempt bonds for distressed cities and towns, and removal of existing, costly obstacles to issuance of tax exempt municipal bonds.

The administration expects to submit 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 billion for private sector tax incentives over the next four years on April 5. The administration intends to combine the spending cuts, investments and tax incentives, and tax increases into one, massive package---called reconciliation legislation. The administration hopes Congress will complete action on the measure before the August recess.

To reduce the federal deficit, the President proposed more than $245 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

To leverage investments in cities from the private sector, the key city priorities the President requested include:

Municipal Priority

Tax Extenders

Reauthorizing retroactively and permanently extending the expired municipal authority to issue tax exempt municipal mortgage revenue and small issue industrial development bonds, reauthorizing and extending permanently the low income housing and targeted jobs tax credit programs.

A Distressed Cities and Towns Enterprise Zone Program

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. Rappaport said this proposal was still under consideration by a White House-led interagency task force, but suggested that the final plan submitted by the President would provide broader access to municipal economic development financing than Congress proposed last year.

He indicated 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. The proposal would provide for nearly $5 billion in direct aid and tax incentives for up to 50 urban and rural enterprise zones over the next five years.

Reducing Municipal Bond Mandates

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. The proposal would also double the exemption from the arbitrage and rebate mandates from $5 million to $10 million, which could significantly reduce the cost for many more smaller communities to issue traditional general obligation and revenue municipal bonds.

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). 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.

The second panelist, Dennis Zimmerman of the Congressional Research Service of the Library of Congress, questioned whether the administration's overall economic plan offers much for cities: "A relatively small list of things in the President's economic plan apply to cities."

Zimmerman raised concerns that the tax incentives proposed by the administration favor capital over labor, encouraging local businesses to substitute computers and new machinery in place of jobs, perhaps further aggravating the unemployment problems confronting many communities. He suggested cities would fare better if the Congress and administration focused on health care reform, welfare reform, and even higher taxes and more spending cuts to further reduce the deficit.
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Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Mar 22, 1993
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