1996 legislative wrap-up: dismal start, strong finish.

• Author: Markoe, Jeannine

The second session of the 104th Congress stood in stark contrast to the first. While 1996 began with much of the federal government shut down due to continued debate between Congress and the administration over the still unfinished FY1996 spending measure and other budget legislation, the political climate soon began to change. Talk of revolution was replaced by reconciliation, and efforts turned toward an orderly legislative process rather than an intense drive to change the size and role of the federal government. The result was a surge of bipartisan lawmaking. By the time Congress adjourned in October 1996, a number of ground-breaking laws had been enacted, including many provisions long advocated by the Government Finance Officers Association (GFOA).

In addition to 1996's successes, emerging GFOA issues were left well-positioned for the 105th Congress. Although there were some unfulfilled legislative ambitions, GFOA's 1996 legislative efforts were an overall success. The accompanying "scorecard" and following discussion summarize GFOA's legislative activity for the past year.

Tax Reform

Much debate surfaced in 1996 regarding the need for a comprehensive restructuring of the federal tax code. Depending on the makeup and control of the next Congress and administration, federal policy makers could move many of the leading tax reform proposals from discussion to implementation.

On May 1, 1996, GFOA President Arthur Lynch testified before the House Ways and Means Committee on behalf of 20 national public-sector organizations to address how dramatically and prominently federal policies on taxation are linked to state and local finance. Numerous concerns were raised by Lynch regarding the possible outcomes of leading federal tax reform proposals, including 1) the loss of municipal bonds' unique standing as tax-exempt income, 2) the loss of the only tool states and localities have for financing infrastructure, 3) a decline in state and local government creditworthiness, 4) the erosion of retirement savings and health coverage, and 5) the imposition of new federal taxes and spending demands on state and local governments. Members of the committee were asked to examine carefully all of the impacts of a tax overhaul should they address the restructuring of federal tax policies, to find ways to ease the financial burden that states and localities may experience, and to call on state and local government officials and their organizations for assistance in any tax reform initiatives.

Tax Code Changes

For a number of years, GFOA has been advocating tax code provisions that would ease restrictions on tax-exempt financing and simplify public pension plan administration. GFOA led strong coalitions to persuade members of the tax-writing committees to include the provisions in emerging tax legislation. It was first hoped that the provisions might be passed as part of a budget reconciliation package designed to achieve a balanced federal budget by 2002. Although many provisions were passed as part of Congress' Seven-year Balanced Budget Reconciliation Act of 1995 (H.R. 2491), the legislation was subsequently vetoed for unrelated reasons at the end of the first session. The provisions remained in limbo at the beginning of 1996 as debate continued over the budget measure. A stripped-down reconciliation package containing only baseline spending measures was signed by the President in April (P.L. 104-134).

Tax-exempt Bond Provisions. Movement on tax-exempt bond provisions in the second session did not meet with as much success as in the first. Provisions that were included in 1995's various budget bills - repeal of the corporate alternative minimum tax, arbitrage relief for bona fide debt service reserve funds, a new 5 percent de minimis rule for the six-month arbitrage rebate exception, and repeal of the yield restriction on reserve and replacement funds - did not reappear. What did resurface, however, was a controversial provision put forth as part of the administration's FY1997 budget requiring all corporations investing in tax-exempt securities to reduce their interest-expense deductions equal to the portion of their total assets that consists of tax-exempt securities. This proposed change sought to repeal the 2 percent de minimis rule which facilitates investments of nonfinancial corporations in tax-exempt bonds. The provision additionally would have caused municipal tax-exempt leases to become more expensive as leasing companies would lose the interest deduction they have been able to take. GFOA and 17 other state and local government groups vigorously opposed this proposal, which the House and Senate subsequently rejected.

Another provision adversely affecting tax-exempt bonds was put forth by Sen. Daniel Patrick Moynihan (D-NY) as the Stop Tax-exempt Arena Debt Issuance Act (S. 1880). This bill defined most bonds issued to provide a professional sports facility as private-activity bonds and...