House Republican plan for tax-deferred account could hurt bond demand.

WASHINGTON - House Republicans appear to be resurrecting a proposal to create an enhanced tax-deferred savings account that municipal market participants have warned could harm demand for tax-exempt bonds.

The Republicans, proposal for so-called American Dream Savings Accounts is part of an ambitious 1995 agenda they unveiled yesterday on the steps of the U.S. Capitol. The plan also includes tax credits, a balanced budget amendment, and elimination of unfunded federal mandates.

The House Republicans said they were entering into a contract with the American people under which they would promise to pass their agenda next year if enough Republicans are elected this November to give the party control of the House.

The new savings accounts would "make it easier for average Americans to save money, buy a home, pay for medical expenses, and send their kids to college," said Rep. Linda Smith, R-Wash., in a prepared statement.

Smith offered no other details, but another document supplied by the Republicans stated that the accounts would provide tax relief for the middle class, an indication that deposits into the accounts would be tax-exempt.

The proposal for American Dream Savings Account echoes plans offered in 1990 by former President Bush and in 1991 by Lloyd Bentsen when he was chairman of the Senate Finance Committee. The plans were never passed by Congress.

The proposals would have enhanced individual retirement accounts by permitting penalty-free withdrawals a few years after funds are deposited for such things as a home purchase or college tuition. They also would have permitted taxpayers to forgo the up-front tax deduction featured under an IRA in favor of a "backloaded" option whereby their interest on the account would be tax-exempt.

Municipal market participants have said they are concerned such enhanced savings accounts would draw individual investors away from tax-exempt bonds by creating a sort of "super" Treasury investment that would carry a higher rate than municipals and also have the added value of being exempt from federal taxes.

In addition to the savings accounts, the Republicans' legislative agenda calls for opening up the tax code to provide a slew of new tax credits, including ones for people who have or adopt children or who care for elderly relatives.

The plan would also phase in a repeal of the so-called marriage penalty that exists under the federal income tax, and would repeal tax increases on Social Security benefits that were enacted in 1993.

If the Republicans' tax cut proposals became a major tax bill that moved through Congress next year, that would give bond proponents an opportunity to persuade lawmakers to add on proposals to ease bond curbs. But lobbyists have warned that a major tax bill would set lawmakers hunting for revenue to offset the tax cuts, an effort that could lead to new bond curbs.

Aside from tax credits, the Republicans' plan would also cut the capital gains tax rate and provide unspecified incentives for small businesses. In addition, the Republicans pledged to "ban unfunded mandates that threaten to bankrupt many local communities," according to a statement they released.

The agenda also proposes passage of a constitutional amendment that would require the federal government to balance its budget and limit the amount of taxes it levies on the American people.

In a preemptive strike against the Republicans' agenda on Monday, Clinton Administration officials warned the proposals would drive up long-term interest rates and lead to soaring budget deficits.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER