Bankruptcy bill earns limited praise

With fewer than three months left in this congressional session, it is beginning to look like the bankruptcy reform bill pushed by local governments will actually become law. The House passed its version (HR 3150) by a veto-proof 306-118 vote in June. That vote encourages cities and counties since President Clinton has made comments indicating opposition to the legislation, which combines consumer and business bankruptcy reform provisions.

HR 3150 includes a section called the Investment in Education Act (IEA), which was part of the companion Senate bill that passed in October 1997. For cities and counties, the IEA is a critical provision of any bankruptcy reform. It protects their interests by placing property tax collection ahead of such items as credit card debt collection in bankruptcy court decisions. Those decisions determine which of a bankrupt business’s creditors get paid, how much, and how fast.

Additionally, under the IEA, a city will not have to issue a property tax refund to a bankrupt business for assessments that are older than a certain number of years (different in each locality). That is true even when the debtor successfully argues that his assessment was wrong.

“My bill will close bankruptcy law loopholes and provide millions of education dollars without raising taxes or spending any additional federal money,” says Sen. Charles Grassley, the Iowa Republican who is the legislative force behind the IEA. (Under current law, the bankruptcy code allows a federal judge to retroactively lower the assessed value of a bankrupt debtor’s property – a provision often in direct conflict with state law. The current code also subordinates local property tax revenues.)

“All of this lowers the amount of money available for education since education is overwhelmingly dependent on local property tax revenue,” says Grassley, who estimates that about 15 percent of Houston’s education budget is lost to bankruptcy. In Dallas alone, six cases of bankruptcy have accounted for $449,593 in lost revenue, according to Jayne Morrell, the city tax assessor/collector.

Despite rave reviews from local government organizations, the bill is not perfect, so the National League of Cities is urging the House to adopt amendments that would clarify interest rates and allow cities to collect back taxes as soon as assessments are final. “The first priority would be to clarify that the interest rate for outstanding ad valorem is the same as the local statutory rate,” says Kathleen Cahill, assistant chief of the tax and bankruptcy division of the Office of the Corporation Counsel in New York City. “Currently, the bill applies an IRS statutory rate, which is approximately 8 percent. But in cities like New York, Houston and small towns in New Jersey, the local statutory rate is as high as 18 percent.”

Cahill adds that cities would like to see the local statutory rate also applied to excise tax claims and tax claims on or measured by income or gross receipts. She also argues that property taxes should not be subject to the five-year limit on payment of back taxes by businesses in Chapter 11 bankruptcy proceedings.

It is likely that the Senate will pass its consumer (S 1301) and business (S 1914) bankruptcy reform bills. NLC is urging it to amend the latter to include the changes to the IEA suggested by Cahill and already part of the HR 3150. The Senate bills would then be conferenced with the House legislation.

Grassley, whose support would be critical, has not indicated support for the amendments, which NLC lobbyist Kristin Cormier calls “minor.”