Money Letter: Washington (March 1980)
DESPITE CARTER’S “PRUDENT AND RESPONSIBLE” BUDGET, FEDERAL SPENDING NEXT YEAR COULD PROLONG INFLATION.
While the Administration is projecting a deficit of only $16 billion, down from $40 billion in the current year, the gap predicted by economists outside the Administration ranges from $20 billion to $40 billion. The Administration arrived at that $16 billion figure by assuming savings that will probably never materialize, says Otto Eckstein of Data Resources. It is counting, for example, on reduced expenditures for Medicare and other health programs as a result of hospital-cost containment, even though, says Eckstein, that bill isn’t likely to get through Congress. Moreover, he says, defense spending is underestimated, since the budget “doesn’t include the true response to the deteriorated situation with the Soviet Union.” The likelihood of big outlays for social programs coupled with stepped-up defense spending is giving some economists an uneasy sense of déjà vu. Says Lacy Hunt, chief economist for the Fidelity National Bank in Philadelphia: “Carter’s new budget is reminiscent of the guns-and-butter policies of the mid-1960s and runs the risk of permanently embedding a high rate of inflation and interest into our economic structure.”
FEDERALLY GUARANTEED 7% COLLEGE LOANS ARE STILL PLENTIFUL — BUT CONGRESS MAY TIGHTEN THE SPIGOT FOR 1981-82.
Congress is likely to pare proposed appropriations for the loan program when they come up for a vote in the next few months, but that won’t affect the availability of funds until the 1981-82 academic year. For now, loans are still easy to get because banks can earn more on the government-subsidized loans than on many other kinds of loans—currently 16% a year. The government makes up the difference between that and what the student pays ; the student is charged no interest at all until after he graduates, and then only 7% a year, with up to 10 years to repay. Undergraduates can borrow as much as $2,500 a year, up to a maximum of $7,500 over four years, and students who go on to graduate school can get another $7,500. In his recent book, Financing College Education (Harper & Row, $4.95), Kenneth Kohl, director of financial aid at Georgetown University, offers a number of aids to finding financing.
GROWING CONCERN ABOUT THE HAZARDS OF UREA-FORMALDEHYDE FOAM INSULATION COULD DRIVE IT OFF THE MARKET.
The insulation, also known as urea-based foam, foamed-in-place and, by some critics, “shrink and stink,” was pumped into the walls of about 150,000 houses last year. But government investigations indicate that the foam substance gives off formaldehyde gas that may cause respiratory problems, skin irritations, headaches and other disorders. Several states have issued warnings and others have set standards for use of the foam, as has the Department of Housing and Urban Development. Massachusetts recently banned the material outright. The Consumer Products Safety Commission may do the same, if nothing can be done to control the escaping gas. Meanwhile, the CPSC wants the Internal Revenue Service to stop giving energy credits for the foam. If you have already installed the foam and you don’t want to tear down your walls to remove it, you’d better make sure your house is well-ventilated.
Some small-time gamblers may soon have to leave 20% of their winnings at the window. Right now gamblers’ winnings on horses, dogs or jai alai are subject to withholding only if they exceed $1,000 on single bets with odds of at least 300 to 1. But under a proposed change in the law, the winnings of a bettor who places several small high-odds bets on the same horse will be subject to withholding if they add up to over $1,000. As a practical matter, however, tracks are likely to withhold on payoffs in all 300-to-l bets; lumping together winnings will probably be too much trouble.
The IRS is investigating the tax status of several recent issues of discount municipal bonds. A state or municipal agency that floats tax-exempt bonds can’t legally invest the proceeds in anything that earns a substantially higher return than the bondholders get. In the case of deep-discount bonds, which sell for well below face value, that calculation is complicated by the fact that the bonds are often redeemed early at a price that is hard to predict. If the IRS decides an agency has juggled the numbers in order to earn a higher return on the proceeds of an issue, it may revoke the tax exemption on that issue and force holders of those securities to pay taxes on the interest they receive. The IRS won’t disclose what bonds it’s investigating, but industry analysts and the Daily Bond Buyer, a trade publication, believe several state housing authority bonds sold late last year are involved. The bond industry believes the current investigation may be the first step in a crackdown that could end with the complete elimination of the tax exemption on certain types of municipal bonds.
Mail-order ministers will no longer find as much shelter from taxes under the cloak of religion. A new section of the IRS audit manual instructs agents to avoid arguing the merits of the ministries and stick to basic principles of tax law. Many mail-order ministers work at outside jobs, turn over their earnings to their church, get reimbursed for living expenses and then report no income; the IRS wants to stop that. The agency will also disallow deductions for contributions to the church if the minister draws an allowance for living expenses. Fraud is hard to prove, so even if an agent is suspicious he probably won’t try to pin a criminal charge on a mail-order minister. But the manual urges agents to assess a 5% negligence penalty in cases where a mail-order minister violates the law.
DON’T EXPECT MUCH OF A PERSONAL WINDFALL FROM THE WINDFALL-PROFITS TAX ON OIL.
While Congress wants to set aside about half the $227.3 billion in revenues raised by the tax to finance general “tax cuts” over the next 10 years, no actual reduction in taxes will result. Rather, the revenues will only slow the inexorable rise in taxes. As for the other half of the windfall tax revenues, part will help pay the fuel bills of the needy and part will be earmarked for conservation. The total take from the windfall-profits tax will amount to about 15% of the $1.5 trillion in added revenues the government expects to raise during the next decade. For the average taxpayer, this could result in a tax saving of about $790 spread over 10 years.