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Senate Approves Tax Bill With Limited State and Local Deduction

Telling reporters "we have the votes," Senate Majority Leader Mitch McConnell, R-Ky., walks to the chamber after a closed-door meeting with Republican lawmakers to advance the stalled GOP overhaul of the tax code, on Capitol Hill, Dec. 1, 2017.

Telling reporters "we have the votes," Senate Majority Leader Mitch McConnell, R-Ky., walks to the chamber after a closed-door meeting with Republican lawmakers to advance the stalled GOP overhaul of the tax code, on Capitol Hill, Dec. 1, 2017. AP Photo/J. Scott Applewhite

 

Connecting state and local government leaders

The legislation passed 51-49, without Democratic support. One credit rating agency described the bill as "negative overall for state and local government finances."

WASHINGTON — The U.S. Senate narrowly passed sweeping tax legislation early Saturday morning, with Republican lawmakers amending their bill to include a $10,000 deduction for state and local property taxes.

With the legislation approved, congressional Republicans and the Trump administration moved one step closer to their goal of overhauling the federal tax code and delivering deep corporate tax cuts and tax reductions for households. 

"This is a great achievement," said Sen. Orrin Hatch, the Utah Republican who chairs the tax-writing Finance Committee.

The roughly 500-page bill's approval came after a turbulent two days of legislative wrangling and down-to-the-wire revisions.

With only GOP support, the legislation passed 51-49 around 2 a.m. Sen. Bob Corker, of Tennessee, cast the lone Republican "no" vote. Corker had raised concerns about how the bill could affect federal deficits.

Passage of the bill further narrowed the chances groups lobbying on behalf of cities, counties, governors and mayors will achieve one of their chief objectives amid the tax code rewrite: fully preserving the deductibility of certain state and local taxes for individuals.

"This bill will severely undermine economic development in cities and towns across the country, add to the deficit and make our country weaker," U.S. Conference of Mayors president and New Orleans Mayor Mitch Landrieu said in a statement.

Municipal bond provisions that people in the state and local government arena have been tracking appeared largely unchanged from the version of the bill that cleared the Finance Committee.

Nick Samuels, vice president at Moody’s Investors Service, described the tax measure that passed the Senate as "negative overall for state and local government finances."

Democrats Discontent 

Democrats lambasted the tax legislation.

Senate Minority Leader Chuck Schumer, of New York, said the bill was being rushed ahead "under the cover of darkness" and that it was loaded up with perks for special interests. He also griped that lawmakers were given a copy of the legislation earlier in the day to review that had hand-written changes. And he noted that there were no updated estimates for how it would affect federal revenues.

"Not a single member of this chamber has read the bill," Schumer added.

Under the legislation, the corporate tax rate would permanently drop to 20 percent, compared to the current top rate of 35 percent.

Individual taxpayer savings would be mixed in the years ahead, varying based on income levels and other factors.

Beyond changes to tax rates and deductions, the bill includes other controversial proposals, which Democrats oppose.

For instance, it would open a portion of the Arctic National Wildlife Refuge, known as the 1002 area, to oil and gas development.

And it would nix the "individual mandate," which requires most Americans to buy health insurance to avoid paying a penalty. The mandate is a central plank in the Affordable Care Act, the health care law sometimes referred to as Obamacare.

A Revenue Producer?

Senate Majority Leader Mitch McConnell, of Kentucky, rejected grievances Democrats raised about the process by which the bill was considered. "Everybody had plenty of opportunity to see the measure," he told reporters at a press conference following the vote.

"You complain about process when you're losing. And that's what you heard on the floor tonight," he added.

Republican lawmakers are attempting to craft a tax package that will not add more than $1.5 trillion to deficits in the coming decade. McConnell expressed confidence on this front. 

"This is a revenue neutral bill," he said. "Actually a revenue producer."

Analyses have indicated otherwise.

The nonpartisan congressional Joint Committee on Taxation issued estimates this week for an earlier version of the Senate bill that had been under consideration in the run-up to the vote. It showed the growth the bill would spur would make up for only $458 billion, of the $1.4 trillion in lost revenues it would cause over a 10-year timeframe.

Now that the Senate has passed its bill, attention will turn to negotiations with the House to resolve differences between the two chambers' versions of the tax legislation.

House Speaker Paul Ryan, in a statement issued after the approval of the Senate bill, said: "we will move quickly to a conference committee so we can get a final bill to President Trump’s desk."

Capped State and Local Deduction 

Sen. Susan Collins, a moderate Republican from Maine, proposed the state and local tax, or SALT, amendment for property taxes. Its inclusion in the Senate bill aligns the measure with the SALT provisions in legislation that has already passed the House.

The proposed $10,000 cap on property tax deductions differs from current law, which allows individuals to fully deduct state and local property taxes that they pay when filing their federal taxes. Both the House and Senate bills, as written, would end deductions individuals can now claim for state and local income and sales taxes.

One person familiar with the situation said there is some effort among groups representing local governments on Capitol Hill to press House lawmakers, particularly those from California, to support at least a limited SALT deduction for income taxes in any final tax bill.

But the odds this effort will be successful remain uncertain. Republicans have already been straining to offset the tax cuts they'd like to see without deepening federal deficits in the years ahead.

Proponents of maintaining the SALT deductions say that if they are eliminated it would amount to double taxation for taxpayers, and would also make it more difficult for states and localities to levy and raise their own taxes to pay for projects and services.

Samuels, with Moody’s, said the proposed change to the state and local tax deduction would reduce disposable income for many taxpayers and that it would diminish financial flexibility for states and localities by increasing political resistance to state and local tax hikes.

"The overall negative effect would be felt most sharply in high-tax states such as California, New York, and New Jersey," he added.

Pence Settles 529 Savings Plan Vote

Around midnight, as amendments were considered, Vice President Mike Pence broke a 50-50 tie vote, backing a proposal from Sen. Ted Cruz, a Texas Republican, to expand so-called 529 savings plans.

These are designed to encourage people to save for future college expenses and receive favorable federal tax treatment. State agencies and organizations administer the plans.

The Cruz amendment would broaden the 529 program so that people could also use it to save for tuition costs at K-12  private and religious schools, and for homeschooling expenses.

Sen. Ron Wyden, an Oregon Democrat, bashed the measure, saying it would expand tax subsidies for higher-income households, and would give a boost to private schools at the expense of public education.

Bond Exemptions

Another state and local government priority has been protecting municipal bond tax exemptions, which are credited with keeping down borrowing costs for states and localities when they finance infrastructure.

The House bill would repeal exemptions for private activity and advance refunding bonds issued after 2017. And the Senate bill would end the advance refunding exemption.

Sen. Sherrod Brown, an Ohio Democrat, submitted an amendment that would have stripped the section from the Senate bill that repeals the exemption for advance refunding bonds. But it did not get a vote.

A bloc of 21 House Republicans sent a letter to House and Senate leaders this week urging them to retain the advance refunding and private activity bond exemptions in the tax code rewrite.

State and local governments can issue private activity bonds as part of public-private partnership deals, and for nonprofits like hospitals and universities. Under some circumstances, they can use advance refunding bonds to refinance debt and save on borrowing expenses.

Historic Rehabilitation Tax Credits

The Senate legislation would scale back a tax credit program that can be used to help offset the cost of rehabilitating historic buildings. Sen. Lindsey Graham, a South Carolina Republican, filed an unsuccessful amendment that would have deleted this language from the bill.

The House legislation calls for ending the historic rehabilitation tax credit. It would also phase out the New Markets Tax Credit program, which is designed to direct money from investors to low-income areas. The Senate bill would leave the New Markets program intact.

"Congress must not take away the critical tools cities need to balance their budgets, build infrastructure and provide essential services for our residents," National League of Cities president Mark Stodola, who is the mayor of Little Rock, Arkansas, said Saturday in a statement.

"While we welcome the Senate’s preservation of tax exemptions for municipal bonds and qualified private activity bonds," he added, "we are dismayed that the bill targets other bonds, eliminates key credits and greatly reduces the deductibility of state and local taxes."

Bill Lucia is a Senior Reporter for Government Executive's Route Fifty and is based in Washington, D.C.

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