By Larry Jones
February 12, 2007

Oklahoma City Mayor Mick Cornett, chairman of the Urban Economic Policy Committee, welcomed mayors to the committee’s January 25 meeting that featured speakers on tax and international trade. John Buckley, chief tax counsel of the House Ways and Means Committee, told mayors that Chairman Charles Rangel (NY) “will be far more sensitive to the issues of cities, and states for that matter, than his predecessor.” He reminded mayors that Rangel comes from a long background of working with The U.S. Conference of Mayors and local governments. As an indication of the chairman’s priorities, Buckley said the first hearing the committee held this year was a hearing on poverty and the consequences of poverty. He said Rangel will continue to focus on the cost that poverty imposes on society and build a broad coalition to address the issue.

Energy: in reference to one of the revenue raisers that the committee will likely consider, Buckley said energy will clearly be one of the first issues that the committee will address. One of the key priorities of the new 110th Congress is to eliminate huge tax cuts given to oil companies in 2004. He said the committee is likely to begin hearings in late February, leading to the development of legislation that would be considered in the House by the fourth of July.

Housing: Buckley told mayors that housing is a large priority and that Rangel is committed to work with the chairman of the House Financial Services Committee Chairman Barney Frank (MA), to better coordinate community development tax incentives with grant programs. Further, efforts will be made to achieve greater coordination between housing and other community development projects. “I think the theory here is to try to more effectively use existing resources,” he said.

Alternative Minimum Tax (AMT): another priority of the committee will be to fix the AMT problem that is causing more middle-class taxpayers to face the prospects of paying higher taxes. Buckley explained that if action is not taken, 23 million people will be required to pay higher taxes under the AMT. This has created a very costly problem that will cost an estimated $60 billion annually to correct. He further pointed out that, “The direct consequence on cities is that the interest on private activity bonds is subject to the AMT. So it could really be a large threat to the market for private activity bonds which I believe has been an important part of your community development efforts.” He added that this could have direct consequences on a local government’s ability to finance infrastructure projects, and more specifically to access private activity bond financing.

State, Local Tax Deductions: as a warning, Buckley told mayors that some are suggesting the repeal of local property tax deductions as well as state income and sales tax deductions to help raise money to pay for fixing the AMT problem. He called on mayors to work closely with the committee to make sure this is not a solution to this problem.

Tax Credit Bonds: these are bonds where the tax benefit is provided through a tax-credit bond to the bond holder rather than the exclusions of interest from tax liability. “It’s essentially an interest-free loan,” Buckley said. He pointed out that Rangel views these bonds as a tool for school construction funds and that he can be expected to try to seek a deeper subsidy for school construction, using this tool.

Excise Tax on State, Local Governments: last year an excise tax was imposed on state and local governments and tax-exempt entities that were parties to what are called listed transactions. Buckley explained that the statute is flawed and, in Rangel’s view, it imposes a retroactive tax penalty. He further explained that the way the statute is structured you could enter into a transaction that is not a listed transaction and at a later time the IRS could list that transaction as one covered by the excise tax and you would have no recourse in court. This could have an impact on tax-exempt financing. And although the Treasury Department is trying to fix this problem, it is one the committee is monitoring very closely.

Three Percent Withholding Tax: another problem the committee is concerned about is a withholding tax enacted last year which will require state and local governments that have more than a $100 million in annual expenditures to withhold three percent from payments made to vendors and send it to the IRS. For example, Buckley explained that the statute even applies to small purchases such as airline tickets, car rentals and taxi cabs. The good news is that the statute doesn’t take effect until 2010 which gives the committee ample time to address this issue.

Reeves Barbour, a trade specialist for the U.S. Department of Commerce, International Trade Administration, discussed a variety of services available to mayors and business constituents in their cities. He told mayors that his office has 108 export assistance centers around the country in every state. Smaller states, like Mississippi, have one while states like California and New York have 8 to 10. The agency has a staff of 350 people located in these centers who reach out to many small and medium sized businesses to discuss international trade opportunities, perform free foreign market research and then share information from those discussions with 150 ITA offices located in 86 different countries. The goal is to help find distributors, consumers and foreign buyers for these small and medium sized businesses.

Barbour told mayors his office just recently sent out a letter to all governors showing how many clients were counseled in their states, the number of export successes and the total dollar amount exported. He offered to do the same type of report for mayors, explaining that the agency wants to be a resource to cities. He also told mayors that his office also set up trade missions and provide a number of other services to help increase U.S. exports.