By Larry Jones
May 12, 2003

In a significant move to help America's cities and states, the Senate Finance Committee voted 12-9 on May 8 to approve an economic stimulus package that includes $20 billion in general fiscal relief for state and local governments. Under the bill, funds would be equally divided among state and local governments to be used for a variety of public services including education; job training; health care services (including Medicaid); transportation and other infrastructure projects; law enforcement and public safety; and other essential government services.

Conference Leadership's Reaction

Commenting on the Senate Finance Committee's action Boston Mayor Conference President Thomas M. Menino said "I want to commend Senator Olympia Snowe (ME) for her leadership in proposing this desperately needed fiscal assistance earlier this year and for urging the committee to include it in this bill. I also want to thank Senator Charles Grassley (IA), Chairman of the Finance Committee, for his support, and members of the committee for approving this legislation."

Also reacting to the committee's approval of the measure, Conference Vice President Hempstead (NY) Mayor James Garner said "I also want to express my sincerest thanks to Senator Snowe for understanding the needs of our cities. She knows it would be impossible to enact an effective national economic stimulus without addressing the serious fiscal plight of states and cities. We appreciate the bipartisan support in the Senate for state and local fiscal relief, and as mayors we stand ready to work in the same bipartisan spirit to help win final approval of the provision."

Concerned about the growing fiscal crisis among cities and states, Mayor Menino convened a meeting in Washington last January at which mayors developed an economic and homeland security policy calling for general fiscal assistance for local governments. He explained that due to "a weak national economy and the burden of spending billions of dollars in homeland security investments, America's cities are facing their tightest and most difficult budgets in decades. This measure recognizes that as cities go, so goes our national economy and it renews the vital economic partnership between Washington and our cities."

Senate Finance Committee Action

The Senate Finance Committee adopted a $433 billion tax package designed to spur economic growth and create jobs by providing tax cuts to individuals and corporations, as well as providing fiscal relief to financially strapped state and local governments. To comply with Senate budget reconciliation instructions, which limit the tax cut in the Senate to $350 billion without offsetting revenues or cuts in other services, the proposal calls for $83 billion in new revenues and other offsets. Although the Committee adopted a scale down tax package with a dividend-tax cut significantly different from what the White House requested in its $726 billion economic growth package, most of the other provisions requested by the White House were adopted. These include accelerating to 2003 tax rate reductions scheduled to take effect in 2004 and 2006 under current law; relief from the so called marriage penalty; increasing the child tax credit from $600 to $1000; and increasing small business expenses from $25,000 to $75,000.

With Republicans holding only a one-vote majority in committee (11 - 10), the Senate Finance Committee ran into problems drafting the proposal to attract the support it needed to pass. Senator Snowe's refusal to support an earlier draft, which did not include aid for state and local governments, caused Senator Grassley to concede two days before committee action that the bill could not pass either in committee or on the Senate floor without adding aid for state and local governments.

Senator Snowe also opposed a provision in the earlier draft supported by the White House that would have phased out taxes on stock dividends over a three-year period. To gain Senator Snowe's support, Senator Grassley modified the proposal to reduce taxes on stock dividends instead of phasing them out altogether. Under the proposal, taxpayers will be allowed to exclude $500 in dividend income and exclude 10 percent of all dividend income in excess of $500 starting in 2004 through 2007, and 20 percent for 2008 through 2012 when the provision would sunset.

The full Senate is scheduled to vote on the measure on May 12. Although amendments are expected , Senator Snowe and Senator Blanche Lincoln (AR), the only Democrat who voted for the bill during committee considerations, have made it clear they will not support a bill that does not include aid for state and local governments. Since Senate Republicans only enjoy a one-vote majority (51- 49), Senators like Snowe, Lincoln and George Voinovich (OH) hold the decisive votes. The Conference is concerned, however, that amendments most likely will be offered to earmark a significant portion of the funds for Medicaid and other categorical programs. Mayors were sent an alert on May 9 asking them to contact their Senators to urge them to support keeping the $20 billion as general fiscal relief in the final stimulus package.

House Action

The full House passed its version of the bill (H.R. 2), the Jobs and Growth Tax Act of 2003, on May 9 by a vote of 222 to 203 mostly along party lines. The House version does not include state and local fiscal relief. It calls for $550 billion in tax breaks for individuals and businesses. Although Democrats drafted an alternative proposal that called for $44 billion in aid for state and local governments, it was ruled out of order and never received a vote on the House floor.

Although the House proposal tracks more closely the stimulus package supported by the White House, the cost is significantly less and the dividends provision is different, in that it also reduces instead of eliminating the tax on stock dividends. Under the House proposal, tax rate on dividends and capital gains would be reduced to 15 percent for individuals in the higher income tax brackets and 5 percent for individuals in the lower income brackets. Other provisions supported by the White House calling for accelerating rate cuts, marriage penalty relief and business tax relief were adopted.