$1.7 Trillion Federal Spending Bill — State and Local Effects

This article is part of MACo’s Policy Deep Dive series, where expert policy analysts explore and explain the top county policy issues of the day. A new article is added each week – read all of MACo’s Policy Deep Dives.

Congress is racing to strike a deal on a massive spending package to fund the federal government through September. The omnibus spending bill — which needs to be signed into law by the end of this week to avoid a partial government shutdown —includes $858 billion in defense-related spending and another $772.5 billion for non-defense priorities.

Friday update: Congress has passed the omnibus bill, and will present it to the President for his signature. See NBC coverage.

The package consists of all 12 annual appropriations bills Congress must pass and would fund the government through the remainder of fiscal 2023, which runs through September. While the passage of the omnibus spending bill remains uncertain, there are several provisions of interest to state and local governments.

Cybersecurity Support

Millions to expand cybersecurity services to state and local governments.

The omnibus spending bill includes $43 million for the Multi-State Information Sharing Analysis Center — including the Elections Infrastructure Information Sharing and Analysis Center (EI-ISAC) — to expand cybersecurity services, like mis/disinformation monitoring, to state and local governments.

More Money for Child Care

Billions for child care for low-income families, Head Start Program.

The omnibus spending package would provide $8 billion for the Child Care and Development Block Grant, a 30 percent increase in funding. The grant gives financial assistance to low-income families to afford child care.

In addition, Head Start would receive nearly $12 billion, an 8.6 percent boost. The program helps young children from low-income families prepare for school.

Earlier End to COVID-era Medicaid Rules

The bill includes a bipartisan deal to end a pandemic-era Medicaid policy that gave states more funding and blocked them from kicking people off federally funded insurance, setting a new end date of April 1, 2023, instead of July 2023. Some states have argued that the costs of higher enrollment in the program are too high.

Under the funding bill, states could terminate people’s coverage as of April 1 if they no longer meet eligibility requirements. Advocates for the provision point out that most people disenrolled starting in April will probably transition to coverage in the Affordable Care Act marketplaces.

FBI Headquarters Compromise

After a contentious dispute between Maryland and Virginia lawmakers about the future location of the FBI headquarters, lawmakers ultimately settled on a compromise, directing the federal government to meet with representatives from both states to hear their ideas before deciding where to put the building.

Affordable Housing Tax Credits

Congress appears unlikely to extend the expanded low-income housing tax credit (LIHTC).

In 2018, Congress temporarily increased the amount of the tax credits the federal government gives each state to build low-income housing by 12.5 percent. But that increase expired at the end of 2021.

Citing the nationwide affordable housing crisis, exacerbated by economic pressures like high inflation, skyrocketing interest rates, soaring building costs, and a tight labor market, advocates hoped to restore the funding — which added roughly $100 million worth of the credits for states. Their efforts fell short, however, as Congress appears unlikely to extend the expanded LIHTC.

Expanded Child Tax Credit

Congress appears unlikely to resurrect the expanded Child Tax Credit.

The Child Tax Credit is a tax break to help offset the cost of raising kids. The American Rescue Plan Act (ARPA) temporarily increased the value of the credit from $2,000 to $3,600 for qualifying children under age six and $3,000 for other qualifying children under age 18. In addition, the credit was made fully refundable. Despite a significant push from several lawmakers and advocates, Congress appears unlikely to resurrect the expanded Child Tax Credit.

State and Local Tax Deductions

Congress appears unlikely to increase the cap on state and local tax deductions.

The SALT deduction allows taxpayers to subtract state and local income, sales, and property taxes from their federal tax payments as part of their itemized deductions. But, Congress in 2017 capped the SALT deduction at $10,000 – a move of particular import in states like Maryland.

Several states — including Maryland — have passed legislation to allow non-corporate businesses to pay state income taxes at the entity level rather than at the individual level on their owners’ returns. Because the SALT cap applies only to individuals, these actions aim to help PTEs avoid the cap.

Last year, the US Supreme Court denied a request from New York, New Jersey, Maryland, and Connecticut to review a decision of the US Court of Appeals for the Second Circuit that dismissed a lawsuit brought by four states, including Maryland, challenging the $10,000 limit on SALT deductions. The states’ suit argued the cap violated the US Constitution’s Equal Protection Clause and the 10th Amendment, which protects states’ rights.

According to a report from The Government Finance Officers Association (GFOA), 45 percent of taxpayers in Maryland benefitted from the deduction in 2014, more than any other state. Congress appears unlikely to increase the SALT cap.

Cannabis Banking Reform

Congress appears unlikely to include cannabis banking reform in the omnibus spending bill.

State and local governments supported provisions that would give cannabis companies access to banking services in states where cannabis is legal, which is currently a challenge to the legal status of cannabis at the federal level. Instead, many of these businesses are forced to operate as cash-only and unable to access traditional banking systems.

According to Route Fifty:

After Maryland and Missouri voters approved ballot measures in November, the recreational use of marijuana by adults is now legal in 21 states, two territories and Washington, D.C. But with the proposal excluded from the “omnibus” spending bill, banks still cannot do business with regulated cannabis firms operating in those places, without risking prosecution for violating laws against “aiding and abetting” federal crimes or money laundering.

Cannabis industry groups and state and local governments have been seeking changes included in legislation known as the SAFE Banking Act, which would prohibit federal regulators from cracking down on banks that work with state-regulated cannabis companies.

Race Against the Clock

Every year, Congress must pass, and the President must sign, budget legislation for the next fiscal year — a series of bills that make up the discretionary spending budget. The package consists of all 12 annual appropriations bills Congress must pass and would fund the government through the remainder of fiscal 2023, which runs through September.

The discretionary budget funds most federal departments. If Congress does not reach a spending agreement by December 23 at 11:59 pm, these departments must close unless they have surplus funds.

A similar situation in 2019 led to the most protracted partial federal government shutdown in US history. That impasse, which lasted 35 days, had a significant impact on federal employees and related segments of the Maryland and regional economies.

As previously reported on Conduit Street, approximately 172,000 Marylanders affected by the 2019 partial government shutdown missed out on an estimated $778 million in wages, resulting in $57.5 million less in state and local income tax withholding, and $2.1 million less in sales tax collections. While furloughed federal workers received back pay once the shutdown ended, it’s unlikely that federal contractors could recoup lost wages.

In response, the Maryland General Assembly passed the Federal Shutdown Paycheck Protection Act, which provides no-interest loans to essential government employees who must report to work without pay.

Stay tuned to Conduit Street for more information.

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