Connecting state and local government leaders
Here's a rundown of some of the major provisions that have implications for state and local governments.
WASHINGTON — Congressional Republicans appear to be on the verge of passing a major tax code rewrite in the coming days that could make it tougher for some state and local governments to raise their own tax revenues, and that would also ax a financing tool states and localities use to lower borrowing costs.
House and Senate Republicans unveiled a consensus tax bill Friday evening that would cap an existing deduction for state and local taxes at $10,000 and repeal a tax exemption for what are known as advance refunding bonds, which are used to refinance debt. The plan would also scale back a tax credit for historic building restoration. Supporters of the credit say it has helped with economic development efforts.
The legislation does not include a House proposal to terminate an income tax exemption for interest earned from so-called private activity bonds. The bonds are used in some cases to finance infrastructure projects, such as toll roads, seaports and airports. State and local governments can also issue the bonds on behalf of nonprofits, like hospitals and universities. And the bonds have played an important role for state agencies that support affordable housing.
Also retained in the bill is the New Markets Tax Credit program, which is designed to attract investment to low-income areas.
Republicans are aiming to send the tax bill to President Trump for his signature by Christmas. And, headed into the weekend, it looked as though they had the necessary votes required to pass the measure in both the House and Senate.
A core element in the bill is a sharp tax cut for corporations. The corporate tax rate would be set at 21 percent, compared to the current 35 percent top rate. The legislation also offers a mix of tax relief for individuals that would vary based on income and other factors. GOP negotiators made last-minute changes to the legislation to lower the individual income tax rate for the nation's highest earners to 37 percent. The top individual rate is now 39.6 percent.
State and local government groups pressed hard to preserve the full deduction for state and local taxes as it exists today.
One of the main arguments these groups made is that eliminating, or capping the deduction would make it more difficult for states, cities, counties and school districts to impose and raise taxes to pay for projects and services. This is because taxpayers would be blocked from writing off the cost of these taxes on their federal returns.
But it's difficult, if not impossible, to gauge the extent to which people might balk at future state and local tax increases because of the proposed cap on the state and local deduction.
“Theoretically it is definitely the case that if you are raising the cost to local residents ... it might make it harder for you to raise taxes,” Kim Rueben, a senior fellow at the Urban-Brookings Tax Policy Center, told Route Fifty last month. “But we don’t have a lot of evidence that there have been strong effects.”
The current deduction allows people to deduct state and local property taxes, as well as either income or sales taxes. Under the GOP proposal, taxpayers could still deduct any of these taxes. But the total deduction they could claim would be capped at $10,000, or $5,000 each for married individuals filing separate returns.
"That compromise is a mirage," said Matthew Chase, the executive director of the National Association of Counties. "It looks good in a press release, but it doesn't work in the real world."
Analysts and others say that limiting the deduction would disproportionately hit taxpayers in higher-tax states, such as California, New Jersey and New York.
Republicans are quick to point out that their bill would roughly double the "standard deduction" individuals and couples can claim, to $12,000 and $24,000 respectively. The larger standard deduction means that fewer people would be likely to find it worthwhile to itemize and claim deductions like the one for state and local taxes.
Tax-writers struggled to limit the cost of their bill so that it would not add more than a projected $1.5 trillion to federal deficits over the coming decade. In order to make changes that would cost the federal government revenue, like slashing the corporate rate and rolling back the estate tax, they needed to look elsewhere in the tax code for offsets.
Curtailing the state and local deduction provided a way to come up with hundreds of billions of dollars.
Ending the tax-exempt status of advance refunding bonds issued after 2017 also serves as an offset. Estimates released Friday by the nonpartisan Joint Committee on Taxation show that ending the exemption would generate $17.4 billion between 2018 and 2027.
States and local governments can use advance refunding bonds to refinance debt at lower costs. For instance, the Washington state treasurer's office says that last month it issued about $1.2 billion in advanced refunding bonds, saving the state about $200 million in debt service costs, according to the state treasurer's office.
But, for some local governments, advance refunding can have less to do with interest savings and more to do with restructuring debt service, Justin Marlowe, a professor at the University of Washington's Daniel J. Evans School of Public Policy and Governance, recently noted.
The bonds, he explained, can provide government's a way to push more borrowing costs into the future at lower interest rates, bringing annual debt service within budget constraints. This practice, referred to as "scoop and toss," has come under scrutiny in places like Chicago.
The historic rehabilitation tax credit that would be narrowed under the GOP plan helps to offset the cost of renovating buildings.
Supporters of the credit say it has bolstered neighborhood revitalization. Between 1978 and 2016, the tax credit program, after adjusting for inflation into 2016 dollars, has spurred roughly $131 billion in investments, according to a report from Rutgers University’s Center for Urban Policy Research.
A key change in the tax bill is that it would repeal the credit for certain pre-1936 buildings that do not meet federal criteria to qualify as "certified" historic structures. The tax bill that passed the House last month would have repealed the program entirely.
Chase said the historic rehabilitation credit was a component of the legislation that many county officials had been tracking closely. "Most of these older, stereotypical, small downtowns that have died in the last 20, 30 years, and are coming back across the country," he added, "typically used historic tax credits."
Bill Lucia is a Senior Reporter for Government Executive's Route Fifty and is based in Washington, D.C.