WASHINGTON -- Labor Secretary Robert Reich yesterday suggested scrapping private-activity revenue bonds and possibly other tax breaks that are longstanding hallmarks of the municipal bond business.
Reich made the suggestions indirectly in a wide-ranging speech that attacked "corporate welfare" and sought to set out a Democratic strategy for countering Republican budget proposals stressing tax cuts and cutbacks in government programs.
Reich made his comments to the Progressive Policy Institute, a think tank affiliated with the Democratic Leadership Council that often serves up policy recommendations for mainstream Democrats.
While Reich did not mention municipal bonds in his speech, he called attention to a list of "special tax benefits for particular industries" worth an estimated $111.l billion over a fiveyear period that was released yesterday by the institute. He called the list "at least one possibility" for finding a way to pay for stepped-up federal job training programs and other initiatives aimed at ending the economic slide of many middle-class families.
"Since we are committed to moving the disadvantaged from welfare to work, why not target corporate welfare as well, and use the savings to help all Americans get better work?" Reich asked.
Private-purpose revenue bonds enable state and local governments to raise funds that are loaned to private developers. They include mortgage revenue bonds, multifamily housing bonds, small-issue industrial development bonds, and student loan bonds. Eliminating them, which has been suggested occasionally in the past, would save the U.S. Treasury an estimated $5.3 billion over five years.
Municipal lobbyists said that it was important not to make too much of the proposal to eliminate private-activity bonds because it has surfaced many times before and been defeated. In fact, the institute culled the bond proposal from a 1993 Congressional Budget Ofrice list of options for reducing the federal deficit, according to a footnote in the institute's report.
But the lobbyists also said they were concerned that an official within an administration thought to be supportive of tax-exempt bonds would appear to endorse a proposal attacking municipal finance.
"I'm surprised and disappointed to see the rehashing of a Congressional Budget Office revenue option in the name of progressive policy," said Micah Green, the executive vice president of the Public Securities Association.
"For many years Secretary Reich and President Clinton have advocated enhancing public-private partnerships for infrastructure development. Elimination of privatepurpose bonds would fly in the face of that goal," Green said.
John McEvoy, the executive director of the National Council of State Housing Agencies, said he views the proposal "like an opening shot, although a shot that's been heard before. It's a shot that should be taken as a call to action" by bond proponents, he said.
In addition to the budget office, many others, including the General Accounting Office and the Reagan Administration, have recommended repeal of the tax exemption for private-activity bonds. Each time, bond proponents were able to make their case "and members of Congress, not dazzled by budget-cutter numbers, turned their backs on the economists and turned their faces toward the world and saved the programs," McEvoy said.
Other, more controversial tax breaks affecting the construction industry are also on the institute's hit list: a lower mortgage-interest deduction that would raise $12.5 billion; a $125,000 cap on the exclusion for capital gains on home sales, $2.3 billion; and phase-out of deductibility on interest paid on home equity loans, $12.8 billion.
Reich did not say anything about a separate $114.2 billion list of proposed spending cuts issued by the institute. Those proposals, many of which channel funds to state and local governments, include a recommendation to scrap $6.3 billion in federal grants for wastewater-treatment plants in favor of a revolving loan fund.
Other proposals on the spending cut list include:
* Elimination of grants to upgrade commercial airline terminals, $6.7 billion.
* Scaling back funding for highway demonstration projects, $7.9 billion.
* Phasing out mass-transit operating subsidies, $4.0 billion.
* Reducing Amtrak operating subsidies, $1.3 billion.
* Reducing the essential air service subsidies to small cities, $700 million.
* Ending operating subsidies for vacant public housing in favor of a voucher program for new construction, $900 million.
In addition, the institute suggested raising fees for broker-dealers regulated by the Securities and Exchange Commission.
Labor officials billed the Reich speech as a major economic policy speech in the wake of the midterm elections that swept Republicans into control of Congress.
Too many workers have seen their incomes fail to keep up in the challenging environment of technological change, global competition, and a corporate culture willing to invest in computers while getting rid of employees, Reich said.
"Other factors influenced the recent election, no doubt. But never underestimate the political potency of a declining paycheck," Reich said. He added: "The old middle class has beo come an anxious class."
Reich said that rising interest rates "are hitting middle-class families with higher payments on cars, mortgages, and credit cards, while those earning over $100,000 a year -- who own 60% of the nation's bonds and almost onethird of all other interest-bearing assets -- have much to gain from the rising rates." That statement was not accurate in the sense that rising rates trim bond prices and reduce the value of bonds held by investors.
President Clinton and his top aides have been meeting privately to come up with a strategy for dealing with the Republican-controlled Congress that will take office in January. The speech by Reich seemed to signal an attempt by the administration to recapture the Democrats' traditional support from middle-class voters by assailing corporate tax breaks while challenging Republicans on their own ground of cutting spending.
Joan Pryde contributed to this article.
