Despite two years of active efforts to reauthorize the Secure Rural Schools and Community Self-Determination Act, also known as the “county payments” program, it expired on September 30, 2006.

Recognizing the necessity of expanding the political support if the successful components of the county payments program are to be reauthorized, a bipartisan group of Senators has agreed on a set of amendments. The three central components of the agreement are:

1. A more equitable distribution of federal funds;
2. An enhanced focus on collaborative reinvestment in federal lands through reauthorization of the Resource Advisory Committees; and
3. Financial predictability through a multi-year, phased down transition from current overall funding levels.

In addition, beginning in fiscal year 2008, five years of full funding of Payments in Lieu of Taxes (PILT) is provided to the counties, as was authorized by Public Law 97-258. PILT is a federal program that provides payments to local governments to help offset losses in property taxes due to nontaxable federal lands within their boundaries. PILT payments help local governments carry out such vital services as firefighting and police protection, construction of public schools and roads, and search-and-rescue operations.

Overall, approximately $4.7 billion will be provided for rural schools and counties through fiscal year 2012 by fully funding PILT (approximately $1.8 billion) from 2008 to 2012 and by reauthorizing the Secure Rural Schools and Community Self-Determination Act through 2011 (approximately $2.9 billion).

Background

In 1992, Congress provided some counties in the Pacific Northwest with a financial “safety-net” to help them transition from the timber boom years of the 1980s. The safety-net was scheduled to gradually phase-out over a ten-year period, but demands for a more inclusive program resulted in its early termination and the enactment of another program, the Secure Rural Schools and Community Self-Determination Act of 2000. The concept was originally recommended to Congress by the National Forest and County Schools Coalition as a temporary safety net.

The county payments program dramatically broadened the geographical and substantive scope of the original safety-net payment. The large majority of the funds still were focused on the Pacific Northwest, but the new national program permitted most states and counties across the country to participate and benefit from it, thus providing a measure of financial certainty to all counties that rely on revenues from federal forest lands.

The program also required a portion of the funding to be reinvested in public lands, thereby providing a benefit to all Americans. Most of those projects were implemented through community-based collaboration, which was a primary purpose and highly successful aspect of the county payments program.

Explanation of Amendments

Formula Change: The formula change is at the heart of the reauthorization. Specifically, the new formula has three components. The first component is the formula from the original program, which is based on the three highest revenue-sharing payments from the state during the eligible time period of 1986-1999. The second component is the number of acres of federal forest. Last, the third component focuses the financial support on those counties that have the greatest economic need and is based on per capita personal income.

• The result is a more equitable and focused formula that increases the funding for the large majority of counties, leverages more funding for collaborative forest management, and increases the level of reinvestment and other benefits for federal public lands.

California, Oregon, and Washington will receive economic transition payments because of the dramatic reductions to these states. Transitional payments will occur and be phased down for the first four years and in the fifth year these three states will changeover to the same formula as the rest of the country.

Title II & III: The collaboration through RACs under Title II exceeded all expectations and arguably was the most successful aspect of the program. Title II is reauthorized and a number of technical improvements to the RAC membership rules will be made. Individual counties will be allowed to designate between 13 and 20% of their total payment in Title II and between 0 and 7% into Title III after they have decided how much to focus in the Title I (80 to 85%) programs.

Title III was marked by questionable funding practices by some counties. Those practices led to calls for greater accountability, transparency, and oversight, which would in turn raise administrative costs for both federal and county governments. Title III authorization is narrowed to search and rescue reimbursement, implementation of the Firewise community program, and development of the Community Wildfire Protection Plans as defined by the Healthy Forest Restoration Act of 2003. In addition reporting requirements are established.

Phased-Down Funding: A central part of the compromise that makes reauthorization of the program politically and fiscally viable is a phase-down of funding levels by ten percent.

Other improvements: As with the original program, counties may choose to opt-out of the county payments program and instead receive payments based on historic revenue-sharing provisions. Stability of payments will be provided for counties not participating in the county payments program by distributing revenue-sharing payments annually based on a seven-year rolling average of receipts.

Offsets: Three tax related offsets totaling $4.8 billion are proposed to generate revenue to the U.S. Treasury.

1. REPEAL INTEREST SUSPENSION ($2.2 BILLION)

   Summary: Currently, Section 6404(g) of the Internal Revenue Code (IRC) does not require a taxpayer to pay interest on underreported tax liability if the IRS does not notify the taxpayer of the additional liability within 18 months after the taxpayer files a timely return. However, if the taxpayer files an amended return, stating additional tax liability, within the 18-month window, the IRS deems this equivalent to notice under section 6404(g), and the taxpayer is required to pay interest on the underreported amount. The proposed offset would eliminate any suspension on payments of interests to the IRS for underreported tax liability.

   Taxpayers have a duty to report and pay all tax liability. If they fail to do so, payment of interest on the underreported amount of liability shouldn’t necessarily be based on whether or not the IRS notifies them of their error. There are also provisions in the tax code that protect taxpayers in egregious cases where interest accrues absent the fault of the taxpayer.

2. INCREASE INFORMATION RETURN PENALTIES ($1.6 BILLION)
   
   Summary: An information return is a tax document that businesses are required to file to report certain business transactions to the IRS. Information returns help the IRS track tax liability and improve taxpayer compliance. Penalties for failure to file information returns currently range from $15 to $50. The proposed offset would increase these penalties by varying amounts.

   Increasing tax penalties is one of the least intrusive and least burdensome ways of improving taxpayer compliance, particularly in cases such as this where the current penalties are nominal, and an increase would simply give the provision teeth. GAO has also recommended increasing and updating tax penalties as an effective way of achieving better tax compliance.

3. 457(b) DESIGNATED ROTH CONTRIBUTIONS ($1 BILLION)
   
   Summary: Under current law, 401(k) plans and 403(b) plans may allow workers to designate contributions as Roth contributions. Like contributions to a Roth IRA, designated Roth contributions to 401(k) and 403(b) plans are included in income in the year of the contribution, but investments earnings are distributed tax free if held until retirement.

   Most state and local government workers cannot participate in a 401(k) or 403(b) plans. Instead, states sponsor 457(b) arrangements, but 457(b) plans cannot offer Roth accounts. The proposal would level the playing field for state and local government workers by permitting 457(b) arrangements to offer the designated Roth accounts already permitted in 401(k) and 403(b) plans.