Connecting state and local government leaders

Smartest Places Emphasize Strategic Public Investments, Tax Reform Proposals Accelerate U.S. Race to the Bottom

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Connecting state and local government leaders

Lawmakers on Capitol Hill are wasting time and resources to dismantle two core building blocks of the original federal tax code.

WASHINGTON — The smartest, most competitive places on earth—nations and communities—make strategic investments to grow their economies. They share characteristics of public-private collaboration, especially targeted at linking research, business incubation and workforce readiness.  

Infrastructure development, emphasizing high-speed broadband and broader connectivity of people and places, along with public assets like world-class schools, libraries, recreational facilities and hospitals, are common, essential ingredients.

Unfortunately, the pending federal tax reform packages in the House and Senate will weaken the U.S. position against our global competitors. Beyond adding to our nation's mounting debt, the proposals gut some of the most important incentives that have made America the gold standard for the past century.

The two tax proposals attack our nation's history of state and local investments by slashing the state and local tax (SALT) deduction and curbing market-driven investments in public infrastructure. When the federal income tax was created in 1913, SALT and the exemption of municipal bond interest were two of the six original deductions. This was to avoid federal intrusion into state and local tax revenue and community decisions.    

By shifting to the federal level more than $1.1 trillion in residential tax payments, mostly in state income and local property taxes, we are starving K-12 schools and public colleges and universities. We are inhibiting investments in clean water systems and transportation assets. We are putting our communities at greater risk during disasters and public health epidemics by underfunding public health and safety systems.

In recent years, I've visited every state in the country. In touring business incubators, jails, homeless shelters, corporate headquarters, farms and manufacturing facilities, the most common sentiment I hear is that we must reinvest in our human capital and community infrastructure.

Instead, the pending federal tax proposals being rammed through Congress punish middle-class homeowners and harm rural communities dependent on partnerships, tourism and secondary home owners. The hasty proposals gut the SALT and mortgage interest deductions while also seeking to starve state and local governments of vital resources. Meanwhile, the bills would allow corporations to retain their SALT deductions and even taxes paid to foreign governments.

There is no doubt that private equity investors and hedge fund managers are demanding that Congress give them more favorable returns. However, at the community level, Main Street businesses and community leaders tell us that we need more affordable health care and housing, along with infrastructure investments and broadband connectivity. And we must stem the opioid epidemic and mental health crisis plaguing our communities.

Congress is heading in the opposite direction by reversing more than 100 years of tax policy, calling for the elimination of SALT deductions and curbing state and local financing tools such as private activity and municipal bonds. Nations at the forefront of the modern economy are investing in people, places and public institutions.

Here at home, county leaders are doing just that. And they are typically among the most responsible, fiscally conservative elected officials. These leaders are rooted in our communities, tasked with tackling some of society’s most complex issues—public health and safety, homelessness, services for elderly citizens and children, and disaster preparedness and recovery.

Yet, most counties must operate under revenue caps imposed by state leaders, often restricting county governments to 1-2 percent growth each year. And counties must comply with extensive mandates imposed by federal and state policymakers. Losses in our local tax base and community decision-making authority often result in service inefficiencies and long-term cost increases.

At a time when Congress should be pursuing smart, strategic investments with state, local and private-sector partners, they are instead wasting time and resources to dismantle two core building blocks of the original federal tax code. Middle-class deductions for state and local taxes as well as the exemption for state and local municipal bond financing have paid impressive dividends and must be preserved.

Matthew Chase is the executive director of the National Association of Counties.

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