WASHINGTON -- Sen. Max Baucus unveiled a set of proposals yesterday to spur long-term economic growth that includes ideas that would benefit tax-exempt bonds as well as one that could harm demand for them.
Baucus' proposals would allow infrastructure projects owned by private businesses to qualify for tax-exempt financing, create a national infrastructure bank, and increase taxes on upper-income people. But a change in tax law that he is pushing could help corporate securities at municipals' expense.
Suggesting ways to increase spending on infrastructure projects, the Montana Democrat said Congress should approve legislation that would loosen restrictions on tax-exempt bonds sold for facilities that are privately owned but benefit the public.
"Revising the current limitations on favorable tax treatment of public-purpose facilities run by the private sector could permit the federal government to contribute a modest subsidy to the financing of environmental and related projects," Baucus said in a speech to the Center for National Policy here.
"In cooperation with state and local governments we need to work toward the same goal, not at cross purposes," he added.
The policy center, a nonprofit research organization, released Baucus' proposals yesterday in a report entitled "The New American Economy: Building For The Long Term."
Baucus, third in seniority among Democrats on the Senate Finance Committee, is on the verge of becoming the second most powerful member of the panel with the expected selection later this week of Committee Chairman Lloyd Bentsen, D-Tex., as President-elect Bill Clinton's nominee for secretary of the Treasury. The current second-ranking Democrat is Sen. Daniel P. Moynihan, D-N.Y., who presumably would become chairman of the panel.
Although Baucus was not specific about his idea for loosening infrastructure curbs, he appeared to propose that Congress ease the 10% private-use test for infrastructure projects. That curb limits to 10% the amount of private participation in a project financed by tax-exempt bonds. Baucus' proposal echoes an environmental infrastructure plan offered by Sen. Pete Domenici, R-N.M.
Baucus also proposed the creation of a national infrastructure bank whose basic mission "would be to provide loans to state infrastructure banks at the federal funds rate, but only for those projects that would generate sufficient revenues from user fees to repay the loans." Baucus said he envisioned a $1 billion to $3 billion initial capital contribution to the bank by the federal government.
Baucus' bank proposal appears similar to one that House Majority Leader Richard Gephardt, D-Mo., is said to be developing in conjunction with bond dealers. Under that plan, state and local governments would be eligible for loans from the bank if they provided matching grants for infrastructure projects. The bank would augment seed funding from Congress by issuing a federally insured taxable security.
Along with his infrastructure proposals, Baucus also proposed a number of ways to spur business investment. To pay for those proposals, he suggested a 10% surtax on taxpayers with income of over $1 million annually and a higher top tax rate for taxpayers earning over $150,000 a year. Such measures would presumably increase demand among upper-income taxpayers for tax-exempt bonds.
Another proposal by Baucus which is designed to reform the corporate tax structure, includes one suggestion that could hurt demand for municipal bonds.
In general, Baucus said the tax system needs to be changed so corporate income is taxed only once. One possibility would be to allow individuals to partially exclude from taxable income any corporate dividends they receive.
The dividend-exclusion idea has been floated by other politicians and economists, and has been criticized because it would enhance the attractiveness of corporate securities at the expense of municipals.