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.
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.
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.
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.
- For guidance on how to present your arguments, visit NACo and NLC’s advocacy webpages.
- Also read NARC’s latest blog on the SALT deduction and CQ’s comparison of the House and Senate bills.