WASHINGTON -- A top Senate Republican plans to introduce legislation next month that would eliminate federal income taxes on savings and investment -- a plan that would severely harm demand for tax-exempt bonds.
Sen. Pete Domenici, R-N.M., the incoming chairman of the Senate Budget Committee, said his proposal, called the Unlimited Savings Account, would be launched with the support of at least a dozen senators, several from the Finance Committee.
"We intend to pursue this with vigor," Domenici told a conference sponsored by the American Enterprise Institute. But he acknowledged that passing such a major overhaul of the tax system could take several years.
"I believe it's going to take time, but I'm on a wavelength that we've got to try and get this done," Domenici said.
An aide to Domenici said the proposal, if enacted, would leave investors with little incentive to buy municipal bonds. But the aide added that Domenici's bill would not propose to eliminate the municipal bond tax exemption.
Domenici's bill is an outgrowth of a 1992 report published by the Strengthening of America Commission, a public-private group headed by Domenici and Sen. Sam Nunn, D-Ga. The commission offered a broad economic plan that called for balancing the federal budget in 10 years, investing $260 billion in infrastructure, and replacing the nation's current tax system with a consumption tax.
"This would encourage savings by essentially saying for most taxpayers you deduct from gross income everything you save -- there's no limit," Domenici said. Under the plan, the term "savings" would be expanded to include most investments.
Municipal bond proponents have argued that the plan would hurt state and local governments by driving up their borrowing costs. To attract investors in an environment where all investments are tax free, states and localities would have to match the interest rates on other debt instruments.
Another problem for most state governments is that their income tax systems are patterned after the federal government's. An overhaul of the federal system would mean they would be forced to make the same radical changes.
When asked his opinion of the House Republicans' Contract With America, Domenici said he expects that "some of it will get done, but not all of it" next year. One of their proposals that may have problems, he said, is a plan for creating a so-called "super" individual retirement account, which would permit accounts to be set up for savings goals other than retirement, such as a college education.
Broadening the IRA "runs into a little difficulty" when estimates are made of its cost to the federal government, Domenici said. The revenue loss of such a plan escalates as years go on, he said.
Domenici also said he plans to hold joint hearings with the House Budget Committee early next year on whether to overhaul the process used to estimate revenue gains and losses from tax and budget proposals.
Traditionally, revenue estimators have relied on so-called static economic models to form their calculations. But municipal bond proponents and others have argued that they should be using dynamic models, which take into account estimates of job creation and other economic consequences of tax proposals. Some top House Republicans have said they want to switch to dynamic models.
Budget lawmakers will have "very authentic discussions about the shortcomings of static [models] and also to be realistic about what the shortcomings of dynamic are," Domenici said. "We're going to try to have some hearings very quickly about what it really means."
