Congress Approves White House/GOP Tax Deal, Extends Number of Provisions Favorable to Local Governments
By Larry Jones
December 20, 2010
The House voted 277-148 on December 16 to approve a $858 billion tax package negotiated by President Barack Obama and Republican leaders in Congress. After voting down an attempt to amend the controversial estate tax provision, the House approved the measure unchanged as received from the Senate, where it was approved a day earlier by an overwhelming majority vote of 81-19. President Obama was expected to sign the tax bill into law December 17.
The new legislation will extend the Bush-era tax cuts for both middle-income and upper-income earners through December 31, 2012; extend jobless benefits for unemployed Americans for the next 13 months; reduce the payroll tax from 6.2 percent to 4.2 percent for individuals (from 12.2 percent to 10.2 percent for self-employed individuals); and reduce the estate tax by exempting the first $5 million ($10 million for couples) from taxes and setting the top tax rate at 35 percent. For state and local governments, the new law extends a number of popular tax provisions that are set to expire on December 31, including the optional deduction for state and local general sales taxes, the New Market Credit program and the research and development tax credit.
Build America Bond Program
Unfortunately the legislation did not extend the Build America Bonds program, which provides a direct federal subsidy to local governments to help them offset 35 percent of the borrowing cost of the bond. Popular among mayors, the program is viewed as very successful not merely because it is creating thousands of badly needed jobs across the nation but also because it is helping state and local governments during difficult financial times to address critical infrastructure needsóbuilding hospitals, roads and bridges, expanding transportation systems, convention centers and water and sewage systems.
Before Senate floor debate, a letter was sent on behalf of local governments by nine Senators, including Mark Begich (AK), former mayor of Anchorage, and Dianne Feinstein, former mayor of San Francisco, urging Senate Majority Leader Harry Reid (NV) to include language in the tax package to extend the Build America Bonds program. But due to strong opposition led by Senator Jon Kyl (AZ), programs like Build America Bonds, Recovery Zone Bonds and other bond provisions that were originally approved in the stimulus legislation approved approximately 18 months ago, were not included in the final package.
At press time, we learned that Representative John Mica (FL), who will take over as chair of the House Transportation and Infrastructure Committee in January, said he plans to introduce legislation to reincarnate the Build America Bond program. This is good news for the nation's mayors who strongly support the continuation of the program.
While most Democrats in both chambers opposed extending tax cuts to the wealthiest two percent of income earners and reducing the estate tax, Republicans insisted on extending the tax cuts to all income earners and reducing the estate tax as a condition for their continued support which was need to overcome any procedural roadblocks and ensure final passage.
A summary of some of the key tax extenders of interest to mayors include:
- Deduction of State and Local General Sales Tax was extended for two years, giving individuals the continued option of taking an itemized deduction for state and local sales taxes in lieu of the itemized deduction permitted for state and local income taxes.
- New Markets Tax Credit program, which provides tax credits to local communities to help them encourage businesses to locate and invest in low-income neighborhoods, was extended for two years. For each dollar of private investment, the NMTC program provides investors five or six cents of federal tax credits based on the time elapsed since the original investment.
- Research and Development Tax Credit, which provides incentives for companies to invest in research to find innovative and more efficient ways of providing goods and services was extended for two years.
- Qualified Zone Academy Bonds, which are a form of tax credit bond that offer an investor a federal tax credit in lieu of interest payments, was extended through 2011. Funds raised by issuing QZABs can be used to finance public school renovations, the purchase of equipment, developing course material, and training teachers in qualified areas.
- Earned Income Tax Credit was extended at the higher rate for two years. Under the stimulus bill adopted 18 months ago, the EITC tax credit was increased from 40 percent to 45 percent of the first $12, 570 in annual earnings for a family of three or more.
- Work Opportunity Tax Credit, which provides businesses that hire certain needy individuals a tax credit equal to 40 percent of the first $6,000 of wages paid to such individuals, was extended through December 31, 2011.