Washington Report: The 105th Congress Wraps Up

By Dotson, Betsy | Government Finance Review, February 1999 | Go to article overview

Washington Report: The 105th Congress Wraps Up


Dotson, Betsy, Government Finance Review


Following a productive first session of the 105th Congress in 1997, in which the Clinton administration and Congress agreed on a balanced budget and significant tax law changes were enacted affecting state and local governments, much was expected of the second session. However, early in 1998, the Clinton administration became preoccupied by charges of scandal and Congress' attention was drawn away from its legislative activity.

The second session of the 105th Congress may eventually prove to have been a turning point with regard to state and local government tax revenues and the willingness - some would say enthusiasm - of Congress to preempt traditional state and local government responsibilities. Although strides were made in the tax-exempt debt arena and in the passage of an Internal Revenue Service (IRS) restructuring plan, the year culminated in the inability of Congress to pass major tax legislation. The 105th Congress could be characterized as a year of lost opportunity in the area of pension and benefit relief.

State and Local Taxation and Revenues

Internet Taxation. The Internet Tax Freedom Act of 1998 was perhaps the most significant legislation that affects state and local governments emerging from the 105th Congress. This legislation is important not only for its potential revenue implications but also because it represents a successful effort by Congress to impose its will on the imposition and collection of state and local taxes, a matter traditionally left to the state and local governments themselves. As introduced in early 1997, the Internet taxation bill would have imposed an indefinite moratorium on the collection of many state and local government taxes on transactions taking place over the Internet while an advisory commission examined the electronic commerce taxation issues. State and local governments feared the significant negative impact that such legislation would have on their revenues, particularly on those derived from sales taxes. In the final days of the 105th Congress, a modified bill emerged and was included in the Omnibus Appropriations Act of 1998 (P.L. 105-277). The law, signed by President Clinton in October 1998, provides for the following:

* a three-year moratorium on the imposition of state and local taxes on Internet access;

* an acceptance of taxes already imposed and enforced prior to October 1, 1998, and a continuation of cases already underway regarding existing tax liabilities; and,

* the creation of a 19-member advisory commission, which includes representatives from the federal government, state and local government, industry (including Main Street retailers), and others, to study issues concerning taxation of all forms of remote commerce (including mail-order sales) and to report to Congress and the President within 18 months.

While Congress was debating the Internet Tax Freedom Act, GFOA and other state and local and industry organizations were working under the auspices of the National Tax Association (NTA) Communications and Electronic Commerce Tax Project to reach consensus on taxation issues. Final proposals will likely include simplification of tax administration and reporting. Under the new law, the work of the federal advisory commission may not undermine the work of the NTA project, but project participants intend to be more proactive and to provide recommendations to the commission for consideration and inclusion in its final product. The potential structural and revenue implications of these efforts on state and local government future revenues will be significant.

Regulation of Financial Markets

Securities Litigation. Despite major legislation passed in the previous Congress which severely limited the ability of investors to pursue claims against wrongdoers in federal courts, the federal securities laws were further amended in 1998 by the passage of legislation making it difficult to pursue such claims in state court as well. …

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