Watching Washington: what to look for in 2005: from tax policy to health care reform, the 109th Congress will tackle a host of i

The incoming 109th Congress will again address a host of issues with important implications for state and local governments. As legislation is introduced and regulatory proposals are brought forward, GFOA will keep members apprised of significant developments through the GFOA Newsletter and the association's Web site. Below are some highlights of the issues the Federal Liaison Center will be following in 2005.

COMMUNICATIONS TAXES

Not since the mid-1990s has Congress been so focused on communications policy, especially as it relates to the taxing authority of state and local governments. Congress will review the 1996 Telecommunications Act, as well as piecemeal legislation dealing with communications issues. Of particular concern to state and local governments is the preservation of their authority to enact and administer taxes and fees associated with communication services, utilities, and rights-of-way. Additionally, the treatment of new technologies such as Voice over Internet Protocol (VoIP) will need to be closely monitored to ensure that these services do not receive a "tax-free" pass--a move that would severely curtail state and local tax revenues.

Although Congress passed legislation late in 2004 extending the moratorium on state and local taxation of Internet access until 2007, this issue will likely be re-addressed as part of the larger communications debate. It is critical that state and local governments continue to advocate for a strict definition of "Internet access" that precludes any broad tax exemption for communications services that are bundled together with Internet access.

REMOTE SALES TAXES

Congress will again review the progress that the states are making to implement a simplification of the sales tax system under the Streamlined Sales and Use Tax Agreement (SSUTA). The SSUTA is intended to allow for state and local taxation of remote sales by simplifying the make-up and administration of the sales tax system. SSUTA officials are aiming for an October 2005 target date for voluntary implementation. Although congressional approval of the SSUTA has not yet been achieved, legislation will be forthcoming in 2005 to secure congressional support for the SSUTA. State and local governments must ensure that any federal legislation pertaining to the taxation of remote sales focuses exclusively on sales and use taxes and does not include extraneous language about communications taxes or business activity tax reform measures.

DIRECT FUNDING TO STATE AND LOCAL GOVERNMENTS

President Bush's fiscal 2006 budget is likely to include freezes or even cuts in direct funding to state and local governments in critical areas like transportation, education, and public safety and homeland security. As details are released, GFOA will call on Congress to maintain or increase funding in these key areas and to avoid any new unfunded mandates.

PENSION AND RETIREMENT SAVINGS

The president and his congressional supporters are expected to reintroduce several different proposals to encourage tax-advantaged savings. These proposals, which were unveiled for the first time last year, include Lifetime Savings Accounts (tax-exempt savings for any purpose); Retirement Savings Accounts (consolidation of the various IRA accounts into one type of account that could be used only for retirement savings); and Employer Retirement Savings Accounts (consolidation of 401(k), thrift, 403(b), and governmental 457 plans into one savings vehicle, which could be sponsored by any employer).

Reps. Rob Portman (R-Ohio) and Benjamin Cardin (D-Maryland) have said they also plan to introduce new legislation this year to encourage savings. Similarly, Sen. Charles Grassley (R-Iowa), chairman of the Senate Finance Committee, has also expressed his intention to introduce pension reform legislation.

As has always been the case with pension and retirement savings reform, the public sector will continue to advocate for autonomous public pension laws, as well as measures that make public pension plans easier to administer and create greater incentives for their use.

SOCIAL SECURITY REFORM

Discussions to reform Social Security are already underway. The president's much talked about proposal includes permitting individuals to direct some portion of their payroll taxes into private retirement accounts, where they would likely earn higher returns. The remaining portion of Social Security taxes would continue to go toward covering traditional Social Security benefits. The president has considerable support among congressional Republicans for moving forward with such a proposal. At the same time, proposals to privatize any portion of Social Security face stern opposition from many congressional Democrats, who have serious reservations about eliminating guaranteed retirement benefits and borrowing to finance privatization. As the debate over the future of Social Security unfolds, the public sector must work to ensure that reform efforts do not mandate Social Security coverage for state and local government employees.

HEALTH CARE REFORM

In the area of health care reform, the president's highest priority initiative is likely to be the expanded use of Health Savings Accounts (HSAs), including additional tax incentives for those who purchase them. HSAs allow anyone who pays high deductibles for health insurance to use pre-tax dollars to pay for medical expenses.

Another issue likely to be addressed this year concerns Flexible Spending Accounts (FSAs). FSAs allow employees to set aside pre-tax dollars from their salaries to pay for non-reimbursed medical and dependent-care expenses. Under current law, however, employees are unable to roll over any unused portion of their FSA to the next year: any unused money in these accounts at the end of the year must be forfeited. Several members of Congress have expressed an interest in enacting Legislation to end the "use-it-or-lose-it" rule.

Prescription drug reimportation is likely to resurface in this legislative session. However. unless the administration drops its long-standing opposition to reimporting prescription drugs from abroad, any legislative initiatives to this end are unlikely to gain much traction.

There has been much discussion about the need to reexamine both the Medicare and Medicaid programs this congressional session. These discussions have included the creation of private Medicare accounts, as well as the conversion of Medicaid from an entitlement program to a capped block grant to the states.

Congress will continue to oversee implementation of the Medicare prescription drug law. The Centers for Medicare & Medicaid Services will publish final regulations clarifying and implementing various parts of the 2003 law, including those impacting state and local governments.

GFOA and the other state and local government associations will continue to advocate policies that create and encourage health savings opportunities for public employers and employees without shifting costs onto state and local governments.

TAX-EXEMPT BOND REGULATIONS AND LAWS

With echoes of tax reform reverberating in the corridors of congressional office buildings, there will likely be a lot of barking before any biting can occur. Congress is likely to address the reform measures mentioned above before taking any action that would affect the regulations and laws governing tax-exempt bonds. Still, as tax reform discussions heat up, GFOA will work to preserve the attractiveness of the tax-exempt bond market. Fixing the many problems that have been embedded in the tax code since the last major tax reform in ]986 is equally important. Legislative and regulatory remedies that would benefit state and local governments include simplifying the arbitrage rebate rule, allowing an additional advance refunding, increasing the bank deductibility limits, and streamlining record retention guidelines. Pending regulatory proposals regarding tax-exempt bond opinions, as well as dramatic changes in the state and local government securities (SLGS) program, will also be forthcoming in 2005. GFOA will continue to comment on any such proposals with fiscal implications for state and local governments.

SUSAN GAFFNEY is director and BARRIE TABIN BERGER is assistant director of GFOA's Federal Liaison Center in Washington, D.C.

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