Washington watch: the new leadership's possible effect on issues important to state and local government.

• Author: Gaffney, Susan
• Position: Federal Focus

Throughout 2006 the focus on the November elections affected the congressional agenda, leaving many issues on the table for the new 110th Congress to address. Congress did however approve significant pension reform legislation and two tax bills that impact state and local governments. This article reviews the 2006 federal legislative and regulatory activities, and provides an outlook for 2007 on issues that are of interest to GFOA members and that are part of the GFONs legislative agenda.

TAX ISSUES

Congress passed two significant tax bills in 2006. First, the Tax Increase and Prevention Act (TIPRA) passed in May included provisions that impose new restrictions on pooled bond financings, create a new requirement that tax-exempt bond interest income must be reported to the IRS, institute new penalties for parties that participate in tax shelter activities (including state and local governments), and most significantly, require a new 3 percent withholding and annual reporting requirement for federal, state, and local government payments. The new law requires that beginning in 2011, governments that spend more that $100 million per year on goods and services to withhold 3 percent of the payments made to vendors and contractors, and remit that 3 percent to the federal government, similar to the way in which payroll taxes are administered. The withholding requirement constitutes an unfunded mandate on state and local governments. The Congressional Budget Office estimated the cost to state and local governments for administering the provision would be $62 million (in 2006 dollars) per year. Throughout 2007, the GFOA will be working with other state and local government organizations, including the National League of Cities and the National Association of State Auditors, Comptrollers and Treasurers, to have the law repealed or significantly altered.

In December, Congress passed a second tax bill, the Tax Relief and Health Care Act, to allow taxpayers to deduct state and local sales taxes on their federal tax returns in 2006 and 2007. Individuals in states that do not have an income tax may claim the sales tax deduction, and those in states with an income tax may choose to deduct either income or sales tax on their federal returns. The legislation also includes an extension to the qualified zone academy bonds (QZAB) program, providing $400 million of funding annually in 2006 and 2007 for tax-credit bonds to be issued for school repairs and improvements.

On the regulatory front, the U.S. Treasury Department finalized regulations on the...