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The reconciliation-tax bill analyzed for cities.

When Congress returns from the Memorial Day recess today, the Senate will begin considering the House-passed 1500 page, $343.9 billion deficit reduction or reconciliation legislation. The bill, HR 2264, would bring in a net of $275.5 billion in new revenues and mandate $68.5 billion in permanent spending cuts. Together with more than $100 billion in defense spending cuts and a virtual freeze on new domestic discretionary spending, the President's plan is projected to reduce the federal deficit by nearly $500 billion over the next five years.

Thirteen different Senate committees are required to complete action on their counterpart versions of the massive bill by June 18th, after which those portions will be packaged together for consideration by the full Senate.

For cities and towns, the package represents the largest deficit reduction proposal ever sought by any president. But, in addition to the deficit reduction, the package also includes parts of the President's long-term investment proposals to leverage investment in communities in housing, economic development, and transportation.

It would reauthorize and permanently extend municipal authority to issue mortgage revenue and small issue industrial development bonds; shift nearly $9 billion in gas tax revenues into the Highway and Mass Transit trust funds; and target over $5 billion in tax incentives into the nation's most distressed urban and rural cities and towns.

The House-passed version also contains provisions which would interfere with the traditional principle of reciprocal immunity by imposing the federal Btu energy tax on essential operations of municipal governments and permanently extend limitations on the deductibility of state and local taxes.

Key City Provisions

For cities, the key tax provisions--which account for nearly 80 percent of the deficit reduction as well as almost all the new investment--include education and training changes, tax-exempt bond improvements, a transfer of federal gas tax revenues into the Highway Trust Fund and Mass Transit Account, expansion of the earned income tax credit, permanent investments in low and moderate income housing tools, a new enterprise and empowerment zone proposal, and benefits for community credit corporations.

The House-passed bill includes, as part of the $30 billion economic stimulus portion, municipal aid tax legislation to permanently extend municipal mortgage and small issue development revenue bonds, low income housing and targeted jobs tax credits, and new economic development tax exempt bonds for distressed cities and towns. The key tax incentives and costs are:

* extension of employer provided education aid: $3 billion

* extension of targeted jobs tax credits: $1.5 billion

* extend research tax credit permanently: $10 billion

* high speed rail tax exempt municipal bonds: $.05 billion

* enterprise zones: $5.2 billion

* extend small issue idbs: $.2 billion

* expand the earned income tax credit: $29 billion

* extend municipal mortage bonds permanently: $.8 billion

* extend low income housing tax credits: $4.4 billion

Training & Investment Incentives

The bill would reauthorize and permanently extend employer- provided education assistance, permitting cities and towns to provide up to $5,250 of educational assistance annually to employees which would be excluded from income for federal income tax purposes. The change is effective retroactive to June 30, 1992. The bill would also retroactively reauthorize and permanently extend the targeted jobs tax credit and expand the program to make eligible participants between the ages of 16 and 20 in an approved school-to-work program. The school-to-work program benefit would be available for individuals who begin work after December 31, 1993.

Municipal Bond Incentives

The bill would exempt tax exempt private activity bonds issued by any city from the state volume cap effective December 31st of this year. These bonds may be issued for trains reasonably expected to reach speeds in excess of 150 miles per hour between cities. The bill would permanently extend municipal authority to issue small issue industrial development bonds retroactive to June 30, 1992. These are tax-exempt bonds used to finance manufacturing facilities.

Earned Income Tax Credit

The largest incentive or benefit, and indirect benefit to cities, in the bill is the $28 billion provision to expand and simplify the earned income tax credit. As passed, the bill would increase the refundable credit available to low income families, extend the credit to low-income workers who do not have eligible children, and repeal the young child and health insurance supplemental credits. The intent is to alleviate poverty in larger families, provide work incentives, and reduce tax burdens for fulltime workers with a lower ability to pay taxes. By expanding and increasing the credit, but repealing the supplemental credits, the President hopes to reduce compliance burdens for low income families.

Low and Moderate Income Housing

The bill would retroactively and permanently extend municipal authority to issue mortgage revenue bonds and mortgage credit certificates effective June 30, 1992. These are tools cities and towns may use to finance the purchase or rehabilitation of homes for low and moderate income families. The bill would retroactively and permanently extend the low income housing tax credit and modify the credit to provide that a building not be defined as federally subsidized if it is receiving assistance under the 1990 National Affordable Housing Act as long as stricter targeting requirements are satisfied effective June 30, 1992.

Empowerment Zones and Enterprise Communities

The House-passed bill incorporates the administration's proposed $5.2 billion, two-tiered urban and rural enterprise zone program, which would authorize up to 106 distressed cities and towns to issue a new kind of tax exempt economic development bond. 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 bill would create 10 empowerment zones and 100 enterprise communities during 1994 and 1995. The Secretary of HUD would designate 6 urban empowerment zones and 65 enterprise communities; the Secretary of Agriculture would designate three rural zones and 30 enterprise communities.

To be eligible, cities and towns would have to meet population, distress, and geographical criteria and then compete for selection based upon (1) the effectiveness of a joint state-local strategic plan for a nominated area and assurances that a plan will be implemented, and (2) criteria specified by a new Enterprise Board.

Empowerment zones would be eligible for a 25 percent wage credit, expanded targeted jobs tax credits, "empowerment" savings credits, expensing, accelerated depreciation, and a new kind of tax exempt economic development bond financing. Bonds could be issued for up to $3 million per business; they would be partially exempt from the state volume cap; and would be exempt from the limitations on bank deductibility.

Enterprise communities and empowerment zones would be eligible for the tax exempt economic development financing and expanded credit under the Low Income Housing Tax Credit.

Gas Tax Extension

The bill would extend from September 30, 1995 through September 30, 1999 the 2.5 cent "deficit reduction rate" federal gas tax, but would dedicate 2 cents to the federal Highway Trust Fund and the remaining half cent to the Mass Transit Account effective September 30, 1995. The House and administration made the change to provide additional resources to meet the nation's infrastructure needs.

Community Development Corporations

The bill would permit a taxpayer to take a 5 percent credit during a 10-year period for cash contributions made to any one of 10 community development corporations (CDCs) selected by the Secretary of HUD. The CDCs must serve areas eligible to be selected as empowerment zones and the contribution must be used to provide employment and business opportunities to residents of of the CDC's area.

BTU Energy Tax

The bill would raise $72 billion over five years through the phase in of a federal excise tax on the heat content of fossil fuels, alcohol fuels, and electricity--the BTU energy tax. The energy tax is the second largest component of the President's deficit reduction package.

The proposed BTU energy tax is a broad-based tax on the heat generated by an energy source, measured in British thermal units (BTUs). As passed, it would impose a new federal mandate of as much as six to seven percent of municipal energy budgets. It would set a precedent of the federal government imposing a direct tax on state and local governments, forcing cities and towns to either pass the mandates on in the form of higher city taxes or in reduced services.

Coal, natural gas, and hydro-and nuclear-generated energy would be taxed at the rate of $0.268 per million BTUs, while oil, gas, and diesel would be taxed at a rate of $0.61 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 as near as possible to the final consumer. It would provide a downstream credit for non-fuel use of energy.

According to Congress' Joint Tax Committee, the proposal would impose a $9.5 billion unfunded mandate on states and local governments, amounting to 13 percent of the overall revenue raised--and the only part of the tax that could not be passed on to consumers. The tax is projected to fall disproportionately on local governments for fuel for police, fire, and emergency rescue vehicles; heating and cooling of municipal buildings; and street lightng.
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Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Jun 7, 1993
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