Yesterday, the House Ways and Means Committee released its long-awaited “Tax Cuts & Jobs Act” plan. The proposed tax reform plan aims to streamline the U.S. tax code and create some tax relief for middle and low income Americans by reducing the number of tax brackets, reducing marginal tax rates, and expanding family tax credits.
Unfortunately, these come at the cost of eliminating key deductions and tax credits that many other middle class Americans rely on, help finance local infrastructure and build strong, vibrant and economically sound communities. Here are the 6 things city leaders need to know:
Municipal Bonds Are Not Altered in this Draft
Among the most important tax topics for city leaders, the tax exemption for municipal bonds is not altered, which leads us to believe that this critical financing tool for cities is safe for the moment. NLC will continue to fight to make sure this remains the case throughout the whole markup discussion.
But Some Other Bonds Are Threatened
The tax exemption for newly issued private activity bonds (PABs) is eliminated. NLC and the Municipal Bonds for America Coalition oppose this move. PABs are a critical source of financing for important qualified projects and programs, including infrastructure, affordable housing, economic development and much more. They help spur private investment and allow state and local governments to harness the private sector’s experience and expertise toward public projects and initiatives.
The plan also repeals the advance refunding bonds authorization, directly hitting to cities’ ability to achieve debt service cost savings. Losing the authority to do advance refunding strips away one tool cities have for responding to a sharp economic downturn. Lower interest rates during slowdowns in the economy help make an advance refunding feasible and attractive. In this scenario, cities will lose economically-sensitive revenues like sales taxes, so having the ability to manage otherwise fixed costs — like the debt service bill — is particularly valuable.
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Property Tax Deduction Survives, but Is Capped.
NLC successfully walked back congressional leadership from proposing a complete elimination of the state and local property tax deduction. The plan now proposes permitting a deduction of property taxes up to $10,000. For certain cities in high cost of living areas, this cap will directly impact the bottom lines of middle class homeowners. According to the National Home Builders Association (NAHB), more than 30.5% of homeowners in New Jersey would hit this cap. NLC maintains that any reduction to property tax deductions hurts local taxing control.
Deductions for State and Local Income and Sales Taxes (The Rest of SALT) is Axed.
The plan proposes eliminating these key deductions that incentivize many cities to diversify their sources of revenue and not rely solely on property taxes, which are heavily subject to dips in housing prices. For countless other cities, their state’s respective budgets will feel the pressure from residents with the elimination of these deductions. This will have implications for revenue sharing between states and cities across the country. NLC views this as yet another affront to local control in taxing authority.
Some Key Credits for Cities Are Also Eliminated
The Historic Tax Credit (HTC), which encourages the redevelopment of historic and abandoned buildings, is slated for elimination, along with New Markets Tax Credit (NMTC), which increases the flow of capital to businesses and low income communities by providing a modest tax incentive to private investors. NLC supports the preservation of key tax credits like HTC and NMTC that help revitalize neighborhoods.
No Mention of the “Cadillac Tax”
NLC remains concerned by the potential financial burden that the Cadillac Tax, a 40% excise tax on high-cost employer-sponsored health plans, poses to cities nationwide who offer their employees higher-end health insurance policies. Should this tax be imposed, cities will be forced to choose between absorbing the financial burden of the tax or altering the healthcare options offered to their employees. NLC continues to urge Congress to repeal the tax.
About the authors: Michael Wallace is the program director of federal advocacy at the National League of Cities. Follow him on Twitter @.
Brian Egan is the Public Affairs Associate for NLC. Follow him on Twitter @BeegleME.