Is the Tax Fight Over the SALT Deduction a Sign of Waning State and Local Influence on Capitol Hill?

WASHINGTON — The sweeping tax bill Republicans in Congress sent to President Trump this week marks a year-end defeat for groups that fought unsuccessfully on behalf of governors, mayors, cities and counties to fully preserve a federal deduction for state and local taxes.

There are straightforward explanations for why tax-writers chose to cap the deduction for the state and local property, income and sales taxes households pay at $10,000 in the final legislation. One is that doing so provided a huge sum to help offset rate reductions and other changes GOP members of Congress wanted to make to the tax code.

“We were just a number on a spreadsheet,” said Matthew Chase, the executive director of the National Association of Counties.

But the battle over the SALT deduction, and other aspects of the tax bill, also offers a look at how dynamics have changed during recent years when it comes to state and local government groups lobbying for their priorities on Capitol Hill.

Declining Clout?

In the past, state and local groups beat back proposals to curtail the SALT deduction. “During the Reagan and Bush tax bills we lobbied against it and finally got it taken out,” said Ray Scheppach, who was executive director of the National Governors Association from 1983 to 2011.

It’s hard to say whether the loss this time around is a sign of eroding state and local influence in Congress. “We put a dent in the door on SALT, even though we don't have it,” said Tom Cochran, executive director of the U.S. Conference of Mayors since 1987.

“Do we have the clout that we once had?” he later pondered. “I mean that’s a very difficult question.”

A number of themes did emerge as people reflected this week on the tax debate and what it says about state and local advocacy on the Hill.

Some of these themes are broad, and centered on issues like the hyper-partisan environment in Congress and suggestions that party-line divides between governors have grown. Others are narrow and have to do with the mechanics of lobbying on state and local matters. For instance, the difficulties of explaining why the SALT deduction and the tax exemption for municipal bonds are important in the first place.

All of this is set against the backdrop of a White House known for unpredictability and drastic proposals. And in an era that NACo’s Chase described as a very challenging time to focus on policy. He added: “There is much more emphasis on politics and the horse race.”

Don Borut, who spent 22 years as the executive director of the National League of Cities, stepping down in 2012, flagged what he sees as another issue that shadows state and local lobbying efforts.

“Intergovernmental relations is not sexy,” he said. “It has no public appeal.”

‘Definitely Moved the Needle’

From the perspective of state and local government groups, the final tax bill is not a worst case scenario.

For example, an initial Senate plan would have killed the SALT deduction entirely.

And it wasn’t until negotiations between the Senate and the House that the capped deduction was expanded to give taxpayers an option to write off not only property taxes, but also income and sales taxes.

Likewise, a tax break was preserved for private activity bonds—another state and local priority. The bonds are commonly used to finance some types of infrastructure, like airports, seaports and toll roads, as well as affordable housing and hospital projects.

Lawmakers also ultimately abandoned a House provision that would have phased out the New Markets Tax Credit program, which is designed to attract investment to low-income areas.

A tax credit that helps to offset the cost of renovating historic buildings was scaled back, but not eliminated entirely. Chase emphasized that the historic rehabilitation credit was a priority for his members, and said it has helped to revitalize small downtown areas around the U.S.

In addition to the cap on SALT deductions, another hit in the bill for state and local governments is the repeal of a tax exemption for what are known as "advance refunding bonds" issued after 2017. States and municipalities can use these bonds in some circumstances to refinance outstanding debt and cut down down on their borrowing costs.

“There's no question we are not 100 percent satisfied with the tax plan,” said Clarence Anthony, the executive director of the National League of Cities. “But there was some success.”

“We started at zero with SALT proposals,” he added. “We definitely moved the needle.”

A main argument state and local groups made against eliminating or limiting the SALT deduction, is that it would make it harder for states and localities to impose and raise their own taxes to help pay for projects and services. The thinking goes that residents would become more resistant to state and local taxes because they would no longer be able to write-off the expense on their federal tax returns.

Analyses suggest this potential phenomenon is more likely to affect high-tax states like California, New York and New Jersey, which also tend to lean Democratic. Officials in these states are quick to say that their residents and businesses pay more in taxes into the federal coffers already, effectively subsidizing lower-income, lower-tax places.

NACo's Chase lamented that the narrative about the deduction in recent months "moved from: 'are we going to prevent federal intrusion and the federal dominance of tax,'” to “a battle over red versus blue states.”

‘Our Highest Priority’

When discussions began percolating about the possibility of a tax overhaul this year, there were worries among state and local officials that a long-standing tax exemption for standard municipal bonds could be at risk. “Muni” bonds are a primary tool states and localities use when financing infrastructure, like bridges and libraries.

Because interest earned on the bonds is tax-exempt, it’s generally understood that buyers are willing to accept lower interest rates than they otherwise would, which reduces borrowing costs for the governments issuing the debt, in turn saving taxpayers money.

"The level of education and effort that we had to put in to educate people on what is a tax-exempt municipal bond was scary,” Chase said.

“The fact that it's a $3.7 trillion industry and funds 80 percent of our nation's infrastructure and very few members of Congress or congressional staff had ever heard of tax-exempt municipal bonds was an eyeopener to us that we need to go back to the basics," he added.

Municipal bonds are something mayors, county commissioners and governors are all typically willing to go to the mat for.

Barry Anderson, former deputy director of the National Governors Association, recalled a discussion he had about four years ago with governors about the prospect of a tax code revamp.

“Except for that narrow group of high-income, high-tax states, the governors were clearly much more focused on the muni bond exemption than they were on the SALT limitation,” he said.

Cochran described how he and other state and local representatives met with White House officials earlier this year to talk about tax policy.

"We said, 'look, we're only concerned about two things. We're not going to get into the rates. We're not going to go there. You take SALT off the table and you protect our muni bonds and we're going to leave this thing alone. But if you don't, we're going to raise hell and it's going to be a fierce battle.' They did not like that at all."

Despite coming up short on SALT, Scott Pattison, the current executive director of the National Governors Association, pointed out that on munis, his group and others prevailed. “Our highest priority from the beginning of the tax bill was to preserve municipal bonds and the private activity bonds,” he said. “Which we did succeed in doing.”

What’s Going on With the Governors?

An idea several people mentioned when discussing the tax bill, and the power state and local government groups currently wield on Capitol Hill, is that over the last two decades or so partisan differences between governors have become wider, making it harder for the National Governors Association to take strong positions alongside other state and local organizations on issues like SALT.

“It's changed dramatically. Back in the ’90s, governors were kind of governors first,” said Scheppach. “And now, they're Democrats and Republicans first and governors second."

“The whole bipartisan approach really has been ripped apart over the last 10 years,” he added.

Inflaming Democrat-Republican divides between governors, according to the former NGA director is partisanship in Congress. “We would get a bipartisan position with 35 or 40 governors and both sides would try to, sort of, go to governors and pull them off.”

Cochran provided a similar assessment.

“They have been crippled somehow,” he said of the governors. “A lot of them are running for president,” he added, “So they don't take any positions like we take. You seldom see them on a letter with us.”

Asked if governors had become more partisan over the years, and whether that affects broader state and local lobbying efforts, Borut, the former NLC director replied: "There’s no question about that.”

Pattison doesn’t see it that way. “I guess my perspective is different,” he said. As it stands, he added, “I've never seen such engagement and communication between governors and state and local groups.” Is NGA's influence in Congress waning? Pattison said he believes it tends to vary year-to-year. "I don't think it's like this straight line decline." 

The governors, he noted, sent a bipartisan letter to conference committee members who negotiated the final tax bill earlier this month. “Ds and Rs compromised,” Pattison said, as he discussed the letter. The letter made clear that the governors wanted to see the preferential tax treatment for private activity bonds maintained. It also outlined support for SALT, according to Pattison.

But, at that late stage in the process, he added, “we didn’t want to push too hard on SALT, because we felt that a lot of that had left the station.”

Anderson, the former NGA deputy director, offered this take on the association: "The partisanship, has that increased in the governors? Hell yes. But it's increased everywhere.” He continued, "does that diminish the impact of the NGAs and the NACos and things like that? Yes. Does it wipe it out? No.”

Rift Over ‘Aggressive’ Coalition Tactics

About a week before the final tax bill was unveiled, the National Governors Association announced it had pulled out of a coalition of state and local groups, and other organizations, called Americans Against Double Taxation, which was lobbying for the SALT deduction.

A statement from NGA cited the coalition’s “aggressive tactical decisions” and emphasized that the governors association had not contributed money to it.

Pattison said the governors association was caught off-guard when the coalition engaged in efforts to target certain members of Congress in their districts over their support of the tax bill. "We had no idea," he added. He said he wasn’t sure what exactly this advocacy involved. But when NGA staff learned of it, the group broke ties with the coalition.

This decision, Pattison said, had nothing to do with a letter that Gov. Scott Walker, a Wisconsin Republican, and 20 other GOP governors sent to congressional leaders around the same time urging them to "pass meaningful tax reform legislation."

And NGA's stance remained the same: that the SALT deduction should be preserved. “Nothing about our position changed,” Pattison explained. But “NGA is a bipartisan group, we don't get involved in these types of tactical things,” he added. “They just pushed it too far.”

‘Those Guys Just Kept Everything Locked Up’

Much as it was this year, Scheppach said two areas NGA and other state and local organizations were trying to defend during the 1986 tax overhaul were the muni bond tax exemption and the state and local tax deduction. “In both of those we won,” he added.

But, as Cochran notes, there were some key differences between the process that led to the '86 tax bill and the bill approved this week.

For one, he said, then-Gov. Mario Cuomo, a New York Democrat, was considered a presidential hopeful. A high-profile figure, Cuomo took on a leading role standing up for the SALT deduction.

(Cuomo’s son, Andrew, also a Democrat and the current governor of New York, emerged as one of the more outspoken governors in favor of the SALT deduction in this year’s tax debate.)

Another difference between 2017 and 1986, according to Cochran, was that in '86 the mayors “had friends on Ways and Means.” The chair of the tax-writing Ways and Means Committee in '86 was Rep. Dan Rostenkowski, an Illinois Democrat, who backed the SALT deduction.

This time, “there's been no opening, or any discussion on this, on SALT. Mr. Brady and those guys just kept everything locked up,” Cochran said, referring to current Ways and Means Chairman Kevin Brady, of Texas, who was one of the chief architects of the tax bill.

Pattison offered a comparable view on the legislative process used this year to craft the tax bill.

“No one can deny there was a lack of transparency. The negotiation and activity took place in solely one party,” he said. “This was not a regular order type of congressional process,” Pattison added, noting this made it more difficult to engage with and influence.

Scheppach said that in the era when the ’86 tax bill passed, it was not unusual for NGA's executive committee of nine governors to meet with the leadership—sometimes the bipartisan leadership—in the House and Senate. “Those were the types of meetings that were just enormously productive,” he said. “But it just doesn't happen anymore.”

'Bizarre Time'

The tax debate is just one lens that it's possible to look through when considering the sway that state and local government advocacy organizations have these days in the nation's capital.

Before Cochran delved into a discussion this week about the tax bill, he took time to recount some of the other policy controversies the Conference of Mayors and the group's peers have grappled with—and often held their ground on—at the federal level, in the months since President Trump took office.

These have involved issues like hard-line actions on immigration. There was also a White House budget plan that called for severe cuts to popular state and local programs, like Community Development Block Grants, “TIGER” transportation grants, and the Home Investment Partnerships program. And there were GOP proposals in Congress that promised to sap federal funds going to states for Medicaid.

"This is a bizarre time," Cochran later added. "The most seasoned people on the Hill will tell you it's a bizarre time.”