WASHINGTON -- A list of options for reducing the deficit compiled by the Office of Management and Budget proposes no new limits on tax-exempt bonds, but does suggest drastic cutbacks in the amount of income tax deductions permitted for middle and upper income taxpayers.
Analysts said such a change could boost demand for tax-exempt bonds, because a taxpayer with no ability to claim itemized deductions would move more quickly into a higher tax bracket. The taxpayer would also have more incentive to reduce his taxable income and get into a lower bracket.
The options are contained in an internal memo prepared by OMB director Alice Rivlin that was leaked by White House officials to Republican strategists over the weekend and obtained by The Bond Buyer.
In addition to deficit-reduction recommendations, Rivlin also makes suggestions for new Clinton Administration initiatives, including setting up an infrastructure bank and adding two dozen more enterprise zones to the 104 created by zone legislation enacted in 1993.
Yesterday Rivlin reportedly denied that any of the options are under active consideration at the White House, describing her memo as a catalog of ideas.
Rivlin's memo, dated Oct. 3 and titled "Big Choices," contains a number of ideas for increasing taxes, including eliminating all itemized tax deductions for middle- and upper-income taxpayers. Under the proposal, only taxpayers at the 15% marginal income tax rate would be permitted such deductions.
Also on the tax side, Rivlin suggests limiting the mortgage interest deduction currently permitted for second homes. Alternatively, the deduction could be limited to an annual amount per taxpayer, such as $12,000 for single income tax filers and $20,000 for joint filers.
Another suggestion by Rivlin would eliminate the deduction for state and local income taxes, a proposal that has long been staunchly opposed by municipal government officials.
A tax lobbyist said leaking the memo was probably an effort by the Clinton Administration to counteract a group of legislative proposals unveiled by congressional Republicans last month that they dubbed their "Contract With America."
The Republicans said their legislative agenda for 1995 includes proposals for new tax credits, incentives for small businesses, and a constitutional amendment to balance the federal budget. The GOP promised to pass that agenda next year if enough Republicans are elected this November to give the party control of the House.
Rivlin listed many possible budget packages in her memorandum, but she looked beyond the fiscal implications of the various programs to the political realities facing the administration in the 104th Congress.
Anticipating another call for a balanced budget amendment, Rivlin discussed the challenges facing both the administration and Congress if a bill were to be revived as the House Republicans promised in their "contract."
If the administration were to proposed balancing the federal budget by either fiscal 2000 or 2005 and increase public investment, the public would have to be "galvanized" to follow presidential leadership and understand the long-term implications associated with raising living standards.
Balancing the budget within 10 years would require "highly progressive options in tax expenditure and entitlement reform" including one-year freezes of funding and "other steps" to assure all sectors of the economy participate in the necessary fiscal restraint.
Another option for the administration is to remain on the same budgetary path, or to continue shifting the focus of the federal budget toward investment initiatives like education, technology, and infrastructure, Rivlin said in her memo.
The benefit of not adding to the already-large agenda is that it would allow the administration to concentrate on implementing and highlighting previous accomplishments. The administration would then be able to refocus on a deficit-neutral health care reform package and a welfare reform program, and to "continue to fight for investments in the appropriations process," the memo said.
Another possible strategy for the Clinton Administration for the fiscal 1996 and fiscal 1997 budget proposals is to "cut and invest," Rivlin's memorandum suggested. The administration would build on the commitment to making "life better for the average citizen" by taking on special interests and eliminating tax loopholes and spending giveaways that hurt economic growth. Some of the "giveaways" would include subsidies to energy, transportation, and aerospace.