Carpetbaggers

Ever since the Civil War, the Federal Government has not been very popular in Georgia. Last week the Peach State and its capital, Atlanta, got an unusual chance to shoot back once again at Washington, this time over tax reform. In one of the first legal challenges to the Reagan Administration's 1986 Tax Reform Act, the city and state governments filed suit in federal court, charging that the measure unlawfully restricts the tax-exempt status of interest from municipal bonds. Former U.S. Attorney General Griffin Bell, who is handling the plaintiffs' suit, claims that the act places unconstitutional limits on the ways that state and local governments can raise funds.

Bell contends that the act is in violation of the Tenth Amendment, which leaves to the states all powers not specifically reserved in the Constitution for the Federal Government. At issue are two clauses in the new law that affect the sale of state and local bonds. The first dilutes the attractiveness of the securities by limiting the traditional tax exemption on interest from so-called general obligation bonds. The second radically restricts the ability of governments to increase their revenues by reinvesting funds raised from bonds. Previously, in a process known as arbitrage, state or city governments could issue bonds at a given interest rate, reinvest the proceeds at a higher rate of return and pocket the difference. Under the new law, state and local governments would have to turn most of those profits over to the federal treasury.

In Georgia the proceeds from arbitrage have amounted to as much as $40 million a year. Atlanta Mayor Andrew Young points out that the city has been able to lower the cost of renovating its zoo by some $3 million by using the now banned technique. On a nationwide basis, the numbers mushroom: the total value of outstanding bonds issued by approximately 40,000 state and local jurisdictions is at least $729 billion.

Argues Georgia State Auditor G.W. Hogan: "The Government is imposing a tax on our income." Why is that allegedly unconstitutional? Says Frank Shafroth, federal relations director for the National League of Cities: "For 200 years the Federal Government didn't tax state and local governments or regulate their taxing, and the state didn't try to interfere with the Federal Government's power to tax." Shafroth's organization, as well as the Government Finance Officers Association, a national organization of public finance officials, is co-plaintiff in the Georgia suit. Fumes Mayor Young: "The Federal Government has been chipping away at our ability to finance necessary state and local governmental facilities for almost 20 years now. It is time to call a halt."