Agenda Packets - 1986/11/03 - Laserfiche WebLink

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FL-1 Federal Tax Policy: Impact on Cities Further, Minnesota cities are concerned about the repeal of the deductibility of state and local sales taxes. As the negative effects of thesa restrictions become evident, LMC urges Congress to re-examine and remove those provisions that hamper the ability of cities in Minnesota to raise revenues and provide for local needs. Passage of federal ta-_ reform legislation vill have profound effects on every coomunity through changes in tax burden for city residents and businesses, and through the imposition of new mandates, and limits placed on the authority of cities to raise revenues. Ironically, the sweeping restrictions on municipal bond authority will not produce revenues to the federal treasury that had been anticipated. Transition rules in the final legislation provide exemptions for many projects that would otherwise be ineligible for tax-exempt financing. The cost of those transition rules actually offsets most of the new federal revenues anticipated as a result of bond restrictions. Yet, the impact of those limits and restrictions will seriously constrain the authority of cities to raise needed revenues to maintain infrastructure and support local econom'c development priorities. The repeal of the deductibility of state and local sales taxes will also increase pressure to turn to the property tax to fund more public services. Retroactive changes in cities' authority to issue tax exempt municipal bonds impose significant restrictions. Redefinition of public purpose bonds reduces the amount of use, benefit or security of the bond by a private entity, from the current 25 percent to 10 percent. Further, any portion of the bond value over $15 million that benefits a non -governmental entity must be authorized under a lowered state per capita volume cap allocation. Earnings on general obligation and revenue bonds are now subject to limits on arbitrage that may be earned and excess arbitrage earnings will have to be rebated to the federal government. The fact that small cities are expected to benefit from exclusions for cities that reasonably expect to issue less than $5 million in bonds per year is not much help when measured against numerous cost increases for new issuance and reporting requirements. The repeal of bank deductibility and the unprecedented taxation of municipal bond interest through the alternative minimum tax will have a dramatic impact on the marketing of municipal bonds and are likely to result in increased bond issuance costs to cities. -73-