Last week House leadership released H.R. 1, the Tax Cuts and Jobs Act: America’s first detailed legislative proposal on tax reform. Here’s what counties need to know about it.
Individual Filers: The Basics
Here’s what the key provisions of H.R. 1 do for individuals:
- Reduces income tax brackets, from seven to four.
- Essentially doubles standard deductions: from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples filing jointly.
- Eliminates personal exemptions.
- Eliminates the deduction for personal state and local income and sales taxes, and caps the deduction for property taxes at $10,000.
- Limits deductible mortgage interest on new mortgages moving forward, to interest paid on mortgage debt of up to $500,000 (currently set at $1 million).
- Repeals many other deductions, including but not limited to student loan and alimony payments, and medical and moving expenses.
Impact on the State and Local Tax Deduction
H.R. 1 eliminates the deduction for personal state and local income and sales taxes, and caps the deduction for property taxes at $10,000. The bill retains all state and local tax (SALT) deductions for corporate filers. As mentioned in What’s Going On With Tax Reform? Part 2, we highlighted concerns that tax reform could include elimination of the SALT deduction, which has been in place since 1913, when the original three-page tax code came to be. Forty-five percent of Marylanders claim the SALT deduction: more than any other state.
In addition, the bill cuts the cap on the mortgage interest deduction in half, to $500,000. Between the cap on the property tax deduction and this tighter mortgage interest deduction cap, American homeowners will experience higher tax bills and also diminished home values, according to Americans Against Double Taxation, a coalition including the National Association of Counties (NACo), Government Finance Officers Association (GFOA), National Association of Realtors, and many others. Diminished home values mean lower assessments, and therefore lower property tax revenues.
Impact on Bonds
The bill removes the tax-exempt status for private activity and advanced refunding bonds. After significant bipartisan advocacy to protect the tax exemption for municipal bonds, counties’ infrastructure go-to came out unscathed. The tax-exempt status of private activity and advanced refunding bonds, however, did not.
Private Activity Bonds
Private activity bonds (PABs) are used when the proceeds fund one or more private entities. Counties might use private activity bonds as part of public-private partnership deals, for solid waste facilities, universities, and affordable housing projects, among others.
PABs are widely used for airport and seaport projects, affordable housing, nonprofit health, and education facilities, all of which contribute to vibrant local communities. In 2016, over $72 billion in PABs used largely by nonprofit hospitals and universities (the private user in these deals is typically the 501 (c)(3) organization that owns and operates the facility) were issued and in the same year over $12 billion were issued to support airports, housing, and rural public cooperatives.
Supporting private activity bond issuance for public purposes … has been a longstanding GFOA position. This legislation would strip away the ability of governments to issue this debt and could impact up to a third of the municipal bond market. That in turn would cause pressures on the entire municipal bond market. Furthermore, concerns remain that Congress could continue to look at other offsets for their tax proposal, which could lead to them eliminating or curbing authority for tax-exempt general obligation and revenue bonds to be issued.
Advance Refunding Bonds
Advance refunding bonds provide counties the opportunity to refinance at lower interest rates before their bonds mature or are callable. Since 1986, governmental bonds have been able to be advance refunded once.
Also from GFOA:
- Advance refundings currently allow state and local governments to take advantage of lower interest rates by lowering interest rates on outstanding debt. This provision forces issuers to essentially accept market conditions in that 90 day current refunding window and, unlike home mortgages, takes away the ability of issuers to refinance for debt service savings when interest rates are favorable.
- Advance refundings are limited, occurring only during the first 10 years of a bond issue and then only when interest rates are lower than the interest rate on the bond; eliminating advance refundings would remove an important financial management tool that allows state and local governments to save billions on interest costs.
- By reducing their debt service expenses through advance refundings, states and localities are able to free up borrowing capacity for new investment in infrastructure and other important facilities, so eliminating advance refundings would likely result in less overall investment in infrastructure.
- Limiting governments to a single advance refunding was a compromise that recognizes how important advance refundings are for states and localities while respecting the interest of the federal government to limit the number of bonds outstanding.
The House Ways and Means Committee is expected to vote on H.R. 1 this week, and bring the bill to the House floor before Thanksgiving, according to NACo.
The Senate Finance Committee is working on its own version of GOP tax reform. That bill is expected to be released this week, and brought to the Senate floor in early December.
The goal is to get President Trump a tax reform bill to sign by Christmas.
This is part four in an ongoing series on tax reform. Read earlier posts here.