State and Local Governments Press Congress on Tax-Reform Priorities
By Jeff Stockdale, senior policy advisor, CSG Washington, D.C., Office
On April 4, 2017, CSG, along with the other members of the Big 7, a coalition of state and local government organizations, sent a letter to House Ways and Means Chairman Kevin Brady urging him to maintain two specific tax provisions of vital importance to state and local governments: the tax exemption for municipal bond interest and the deductibility of taxable income for certain state and local taxes. Both provisions have been features of the United States tax code since 1913, and CSG wants to discourage Congress from using them as revenues.
The federal tax exemption for municipal bonds reduces the costs of issuing municipal bonds, which is vital to taxpayers across the country who pay the interest and principle on municipal bond debt in exchange for investing in public, community assets. Municipal bonds remain the primary method used by states and local governments to finance public capital improvements and public infrastructure projects—including roads, bridges, schools, hospitals and water infrastructure. State and local governments have invested $3.2 trillion in infrastructure through municipal bonds from 2003 to 2012.
As the letter states, the deduction for state and local taxes paid was one of the six deductions allowed under the original tax code when it was enacted in 1913. Eliminating or capping federal deductibility for state and local property, sales and income taxes would represent double taxation, as these taxes are mandatory payments for all taxpayers. Any alterations to the deduction would upset the carefully balanced fiscal federalism that has existed since the permanent creation of the federal income tax more than 100 years ago. State and local governments deploy revenues from state and local property, sales and income taxes to help finance long-term infrastructure projects, local law enforcement, emergency services, education costs and many other services. By eliminating the federal deductibility of these taxes, Congress would be shifting the intergovernmental balance of income taxation and could limit state and local control of their tax systems.
Soon after the Affordable Care Act, or ACA, repeal and replacement legislation was pulled from the House floor due to insufficient votes for passage, President Donald Trump indicated that the administration would turn its attention toward overhauling the federal tax code. As the White House and Congress consider changes to the tax code, CSG will monitor developments and urge lawmakers to protect specific provisions of importance to state and local governments.
“I would say that we will probably start going very, very strongly for the big tax cuts and tax reform,” Trump said, speaking to reporters at the White House. “That will be next.”
Repealing the ACA and harvesting the substantial tax savings that were expected as a result of that repeal were essential to the GOP’s plans to obtain a revenue-neutral tax code overhaul. Failing to succeed in those efforts, lawmakers must begin to identify additional offsets to reach the revenue-neutral tax reform goal.
Shortly after House Speaker Paul Ryan pulled the health care plan from the floor, he stated, “Yes, this does make tax reform more difficult. But it does not, in any way, make it impossible. We will proceed with tax reform.”
Last year, House Republicans issued a tax reform plan called “A Better Way” agenda, which seeks across-the-board rate cuts for individuals and corporations. In order to offset the decreased revenues resulting from these reductions, they proposed a border-adjustment tax, or BAT, which imposes a 20 percent tax on imports while exempting taxes on exports.
Senate Republicans are increasingly voicing opposition to the BAT. In a letter to his colleagues, Sen. David Purdue stated, “Since all imports would be taxed, the clear effect of the proposed border adjustment tax is an increase in consumer prices. This would hammer consumer confidence and lower overall demand, thus putting a downward pressure on jobs.”
Whether a sweeping, comprehensive, revenue-neutral reform package like the House GOP leaders proposed or a smaller targeted package without full offsets is pursued remains to be seen. Any reform effort will have major implications for the states and their budgets.