Concerns Grow Over the Impacts of House and Senate Tax Bills

Congress is back from Thanksgiving break and confronted with some significant choices, including passage of a tax bill that substantially reduces the corporate tax rate and eliminates some common individual tax deductions, like the property tax and the inheritance tax.

From the outset, the goal has been to pass a tax cut bill – good or bad — before Congress breaks for the Christmas holiday. To do this House and Senate Republicans are moving at breakneck speed to get the bill to the president for his signature.

This week the Senate will begin considering its version of the tax reform bill, which is wildly unpopular with the general public. The House passed its version two weeks ago, and if Senate Republican leaders have their way, their version will pass in the next week. This leaves just enough time to conference the two bills and create a single version that can be adopted by both chambers and get it to the president’s desk before the Christmas recess.

Join the National Association of Regional Councils (NARC),
National Association of Counties, and National League of Cities
in opposing the specific changes to tax deductibility and municipal bonds proposed by the House and Senate.
Local Consequence
State And Local Tax

The House and Senate bills would substantially reduce the value of the state and local tax (SALT) deduction on personal taxes or eliminate it entirely, and this would have a negative impact on localities. Though it would generate $1.1 trillion in new revenue for the federal government, it would place substantial pressure on states and localities to reduce their taxes, which in turn would shut off one of the most important revenue sources available to states, counties, and municipalities.

If the SALT deduction is substantially reduced or eliminated, Congress and the president will have demonstrated their complete lack of understanding of the federal partnership that makes infrastructure development in this country possible.

Nearly three-fourths of all infrastructure development is funded by states, counties, and cities. Reducing revenues and other funding sources for infrastructure development is likely to substantially exacerbate an already dire situation in which 56,000 bridges are structurally deficient, upwards of 70 percent of roads in some states are in mediocre to poor condition, and schools, hospitals, airports and other public facilities are in need of repair.

Municipal Bonds

Consider the National Association of Counties’ (NACo) commentary on the House bill and its impact on counties and, by implication, cities.

The House bill would limit what types of municipal bonds are tax-exempt. Bonds used for professional sports stadiums would not be tax-exempt, even though some counties own and maintain professional sports stadiums. According to NACo, “narrowing the scope of tax-exempt municipal bonds would open the door to future changes that would further restrict which types of projects can be supported by municipal bonds.” The cost of borrowing would also increase considerably because bonds that are not tax-exempt would need to have higher interest rates to attract investors.

The House bill would also eliminate the tax-exempt status of advance refunding bonds, which are most often used by governments to refinance their debt at lower interest rates so that the overall cost of a city or county project is less. While most municipal bonds would retain their tax-exempt status, this type of municipal bond would no longer be tax-exempt, again requiring states and localities to forgo a procedure that often substantially reduces the cost of borrowing by counties.

Finally, the House bill would require that interest generated from private activity bonds (PABs) be taxed. PAB financing generally benefits private developers who benefit from lower financing costs when developing projects that have a clear public purpose (e.g. hospitals, airports, affordable housing, seaports, water and sewer systems).

If PABs were no longer tax-exempt, organizations like the California Hospital Association estimate the change could add billions of dollars in added interest costs for hospital construction. And the California Housing Consortium said the change could cut the number of affordable housing units built in the state by two-thirds each year.

National Consequence: The Nation’s Debt

Opposition to either bill is growing – not only because of the harm it would do to the SALT deduction or the use of municipal bonds – but because it would increase the national debt by $1.5 trillion over ten years. According to the Congressional Budget Office (CBO), the Senate bill would have a significant negative impact on families with household incomes of less than $30,000 per year almost immediately. And this opposition is coming from organizations that generally would support new tax policy if it was paid for and would contribute to economic growth.

Among the most vocal groups are the nonpartisan Committee for a Responsible Federal Budget (CRFB) and the nonpartisan Tax Policy Center, each of which has published reports and issued press releases that call into question many of the assumptions in both versions. CRFB has repeatedly criticized both the House and Senate tax cut proposals because they would substantially add to the nation’s debt.

The Senate Bill

Regarding the Senate version, CRFB wrote that:

  • There is no theoretical basis to suggest tax cuts could be self-financing. To do that, the economy would need to grow by $5 to $6 for every $1 of tax cuts.
  • There is broad consensus among economic models that future tax cuts won’t pay for themselves. Some models find tax cuts would be partially self-financing, while others find the economic feedback would actually increase the deficit effect of tax cuts.
  • Past tax cuts in 1981 and the early 2000s have led to widening budget deficits and lower revenue, not the reverse as some claim.
 The House Bill

Even with the use of dynamic scoring, the Tax Policy Center found that economic growth would be about .03 percent more than it would be without the tax cuts. Thus, it would have a much smaller impact on the gross domestic product (GDP) than has been claimed by Congress and the administration. Notwithstanding economic growth, this legislation would contribute about $1.4 trillion to the national debt and improve the overall economy by only a few tenths of a point. (Dynamic scoring attempts to predict the impact of federal policy changes on households and businesses and how that will contribute to economic growth.)

Reduced Revenues Will Mean Less Money for Programs

Moreover, we must not forget that we face efforts to significantly reduce non-defense discretionary (NDD) programs. Transportation, workforce training, public health, economic development, and other NDD programs are being threatened with further cuts that would irreparably harm these federally-sponsored programs. At the same time, defense discretionary spending is targeted for substantial increases in funding. The loss of $1.5 trillion in federal revenues over ten years could only serve to exacerbate this push to reduce non-defense discretionary spending, which in turn would directly impact the people you represent and serve.

Take Action

If we want to protect the interests of cities, counties, and regions, it is imperative that we influence Congress to maintain the SALT deduction, remove limitations on the tax-exempt status of municipal bonds, and restore the tax-exempt status of PABs. Failure to do so would substantially impact the ability of localities to meet their mandates and provide the services we all have come to expect.

If we want to prevent unnecessary increases to the national debt (~ $1.5 trillion) and the potential for even more cuts to NDD programs, than we must convince Congress and the president that neither the House nor Senate bills are the right vehicle to address perceived problems with the tax code.

Join NARC, NACo, and the National League of Cities (NLC) in opposing the specific changes to tax deductibility and municipal bonds that the House and Senate have proposed.


Why the SALT Deduction Matters. Why You Should Save It.

Now is the time to let your senators and representatives know that you oppose elimination of the SALT deduction and that they should vote against any tax proposal that would do this.

Over the next weeks and months, Congress will be debating legislation to “reform” the nation’s tax system. That debate will focus on many things, including corporate taxes, inheritance tax, individual tax brackets, and charitable tax deductions, among others. But none of the debates may prove as important to states, counties, cities, and towns as the state and local tax (SALT) deduction, which allows individuals and households to deduct what they pay to states and localities in the form of income, property, and sales taxes from their federal returns. Both the House and Senate are prepared to eliminate some or all of the SALT deduction to make up for revenue losses resulting from proposed cuts to the corporate and individual tax rates.

Why does this matter? 

The Tax Policy Center estimates that 30 percent of taxpaying households – about 39 million — take the SALT deduction each year. 

These taxes are equally important to the states and localities that collect them. With these funds states and local governments can pay for the services we want and demand, and often take for granted.

These taxes are important to the federal government.

Four hundred twenty-five billion dollars of the $2.3 trillion that is collected by states and localities each year from taxpayers and the federal government is spent on infrastructure – roads, bridges, water treatment plants, and critical buildings like schools and hospitals, to name just a few.[1]

These investments by state and local governments are so significant that overall, the federal government contributes only 23 percent of all the funds spent on infrastructure. Without these state and local funds, the cost to the federal government of building and maintaining our infrastructure would be considerably greater.

According to the National Association of Counties (NACo), state and local governments deploy revenues from state and local property, income, and sales taxes to finance . . . local law enforcement, emergency services, education, and many other services[2] in addition to those used for infrastructure.

Without these funds millions of miles of roads and bridges, mass transit systems, schools, libraries, hospitals, and nursing homes would not be built. Residents might not have access to the goods and services that they currently do, because the resources needed to pay for these services might not exist.

The deduction also reflects the historic belief that individuals should not be taxed twice – at the state and local level and again at the federal level. Moreover, it would shift the intergovernmental balance of taxation and limit state and local control of our tax system, according to NACo.

But now that deduction is under attack. House and Senate Republicans have incorporated into their budget blueprints a plan to eliminate some or all of the SALT deduction, something that could have devastating impacts on states, counties, cities, and the residents who live there.

Eliminating the state and local tax deduction would subject a larger share of taxpayers’ itemized income to federal taxation by adding back in the local taxes already paid as taxable income. It would also put acute pressure on state and local governments to reduce their taxes dramatically. New York Governor Andrew Cuomo said that if the SALT deduction is eliminated New York State “will be destroyed” because of that pressure on the state and local governments to reduce or eliminate some taxes. Other high tax states like California and New Jersey will feel the same pressure to reduce taxes from their state and local taxpayers, potentially cutting off major sources of revenue.

Here are the facts[3]

SALT benefits the middle class.

Nearly 87 percent of taxpayers who claim the SALT deduction have an adjusted gross income (AGI) under $200,000.

Taxpayers in all 50 states – in both Democratic and Republican congressional districts – claim SALT. Of the top 20 highest-SALT congressional districts, 45 percent have Republican representatives.

If Congress eliminates SALT, middle class homeowners will see their taxes increase. Homeowners that make between $50,000 and $200,000 would see an average tax increase of $815 – even if the standard deduction is doubled.

More facts

States and localities generally raise about $2.3 trillion in taxes each year. Of that, $425 billion are used to help pay for roads, transit, education, and public infrastructure. If states and localities reduce their revenue collection and infrastructure spending, the state of America’s crumbling infrastructure would likely get much worse.

State and local taxes pay for a wide range of important services beyond those previously mentioned – they also pay for higher education, public welfare, and public safety.

What does this mean?

If states and localities are forced to reduce their taxes, many community services will be reduced or eliminated. Above all, families and individuals across the nation will be likely to experience diminished quality of life.

What can I do?

As efforts to reform the nation’s tax system gain steam, so too must efforts to preserve this vital deduction – the state and local tax deduction.

Now is the time for elected officials and those that value good government to tell their senators and representatives that eliminating the SALT deduction may lead to significant, long-term damage in our communities – and ultimately, states, counties and cities will bare that responsibility.

Contact your senator and representative to tell them that while it may be the time for tax reform, it is not the time to eliminate the SALT deduction. For more information see GFOA’s report on revenue losses by congressional district and the Big 7’s Americans Against Double Taxation.