WASHINGTON -- State and local finance could be both hurt and helped if recommendations contained in two major proposals released this week were enacted by Congress, state and local lobbyists said yesterday.
One proposal recommended by President Clinton's Bipartisan Commission on Entitlement and Tax Reform would eliminate the federal tax deduction for state and local income taxes -- a move that would increase pressure on state and local governments to reduce taxes, said Reggie Todd, legislative affairs director for the National Association of Counties.
However, that proposal would be counter-balanced by recommendations that could increase the demand for tax-exempt bonds and drive down interest rates. Those proposals, contained in a report prepared by the commission's staff, recommended reducing the maximum amount of mortgage interest that can be deducted, eliminating the deduction for charitable contributions, and further limiting other itemized deductions.
The loss of those tax breaks for higher-income individuals would send investors looking for tax shelters and possibly increase the demand for tax-exempt municipal bonds, Todd said.
The second report, released by the Democratic Leadership Council and its affiliated think tank, the Progressive Policy Institute, contains recommendations to cut "special tax benefits to certain industries." While the specific recommendations were not spelled out in the report, they would include eliminating the tax exemption for private-activity revenue bonds, according to an institute aide.
The report's recommendations, including scrapping private-activity bonds, were indirectly revealed in a speech by Labor Secretary Robert Reich last month in which he said, "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?"
After the speech, 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. Just last year, the Congressional Budget Office suggested and Congress rejected eliminating the private-activity bond as one way to help reduce the federal budget deficit. The proposal also was suggested and rejected by Congress when it reformed the tax system in 1986.
The report also recommends shifting power away from the federal government to state and local governments to allow them to set spending priorities.
One way to define each level of government's responsibilities would be to hold a federalism conference with participants from all levels of government to "discuss a plan for restoring the balance of power among federal, state, and local governments."
Many of the recommendations in both reports have been made before, said Jim Martin, director of state and federal relatios at the National Governors' Association.
The association has been talking about a federalism symposium for at least five years, Martin said. And, the U.S. Conference of Mayors has already planned a session on federalism in their annual conference in March, said Kevin McCarty, assistant executive director of the U.S. Conference of Mayors.
Both reports, while only suggestions, raise important topics for discussion, said Todd of the counties group. Unfortunately, the suggestions "are on a collision course" with the Republican "Contract with America," which calls for cutting taxes and government spending, but doesn't address tax expenditures, he said.
"We're glad someone is thinking creatively. There's an opportunity for meaningful change," said Frank Shafroth, lead lobbyist for the National League of Cities.
The Progressive Policy Institute suggested taking the savings from eliminating subsidies to industries and high-income individuals and investing in infrastructure projects. Some of those suggestions included:
* Upgrading highways and mass transit by increasing interstate highway investment by 50% and expanding mass transit projects. The initiatives would cost $7.3 billion over five years.
* Doing away with direct grants for water treatment projects and replacing them with revolving loan funds states could use to leverage the federal money by issuing tax-exempt bonds. This initiative would cost $10 billion over five years.
