Analysis of Key Provisions of the President's Economic Recovery Plan

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The President last Tuesday signed the 1800 page economic recovery and deficit reduction bill, HR 2264, into law. As enacted, the new law is expected to reduce the federal deficit by about $496 billion over the next five years, $255 billion from spending cuts, and $241 billion from tax increases. The reduction in the deficit is expected to level off the growth in the federal deficit, but to have little impact on the rate of growth of the national debt.

The law will not only reduce the deficit, but also significantly alter the nation's budget priorities. While the bill calls for net reductions in federal entitlement spending, it actually calls for a significant increase in such spending for families falling below the poverty level. While it calls for large tax increases for high income persons, it provides tax relief for the lowest income families.

The new law will provide a number of economic incentives, including many directly and indirectly affecting the nation's cities and towns. But the spending cuts and many of the tax changes will impact the way cities do business.

Following is a brief analysis of some of the key elements for municipl officials:

Taxes and Revenues

The new law raises $268 billion in taxes over the next five years, but provides $29 billion in tax incentives to reduce the federal deficit and provide, incentives to stimulate the economy. It includes municipal aid tax legislation to permanently reauthorize and extend municipal mortgage and small issue development revenue bonds, and low income housing tax credits. It includes a proposal for new economic development tax exempt municipal bonds for distressed cities and towns, and $1 billion in new spending to go to states for programs in the most severely distressed cities and towns.

The major tax increases include:

* raising individual tax rates to 36 percent for high income persons - $115.1 billion

* closing loopholes - $4.6 billion

* raising corporate tax rates - $24.2 billion

* cutting deductions for lobbying lunches - $15.3 billion

* elliminating the Medicare tax cap - $29.2 billion

* increasing the amount of Social Security subject to taxes - $24.6 billion

* a 4.3 cent gas tax increase - $23.4 billion

The major tax incentives proposed in the budget include:

* an expanded Earned Income Tax Credit - $20.8 billion

* extensions of expired provisions - $12.4 billion * high speed municipal tax exempt rail bonds - less than $1 billion

* empowerment and enterprise zones - $3.5 billion

The key city priorities include:

Municipal Priority Tax Extenders

Reauthorizing retroactively to June 30, 1992, and permanently extending the expired municipal authority to issue tax exempt municipal mortgage revenue and small issue industrial development bonds, reauthorizing and extending permanently the low income housing tax credit program. The law would change the low income housing tax credit program to permit a greater credit (70 percent of present value) for property using HOME funds if 40 percent of the residents have incomes no greater than 50 percent of median income. The new law would retroactively reauthorize the targeted jobs tax credit program and extend it until December 30, 1994.

Enterprise & Empowerment Zones

The new law authorizes, effective next January, the selection of nine empowerment (six urban and three rural, with one of the urban zones reserved for a city with a population of 500,000 or less) and 95 enterprise zones (65 urban and 30 rural). The urban zones will be selected by HUD Secretary Henry Cisneros, the rural ones by Agriculture Secretary Michael Espy. Designations must be made between now and 1996, and are good for 10 years. There is no minimum population limit for any zone, but there is a maximum of 200,000 or the greater of 50,000 or 10 percent of the population of the largest city in the zone for urban areas; 30,000 is the population ceiling in rural areas. …