Tax Reform Negotiations on the Horizon
Congress heads home for Thanksgiving having made significant progress on tax reform legislation.
Last week, the House of Representatives passed its bill on a 227 to 205 vote. Meanwhile, the Senate Finance Committee approved legislation on a party-line vote. That bill will head to the floor as early as next week.
While the House and Senate bills differ in many respects, they both contain provisions that could have significant impacts on housing, infrastructure finance, and economic development. APA President Cynthia Bowen, AICP, issued a statement outlining the planning issues in the debate and urging Congress to protect vital financing tools for local community development projects.
Overall, the bill approved by the Senate Finance Committee is a marked improvement on the House-passed bill in terms of infrastructure and housing. The Senate bill maintained most development finance tools, including a late amendment to restore the Historic Tax Credit.
More amendments to the Senate bill are anticipated as it moves to the floor. Additionally, some House Republicans who support maintaining tools like Private Activity Bonds are circulating letters to GOP leadership urging them to accept Senate language on these bonds and credits in upcoming negotiations.
The two approaches will have to be reconciled in a compromise package that adheres to strict budget rules that allow the Senate to pass the bill with a simple majority under what's known as reconciliation.
Senate majority leaders hope to pass a bill next week and then turn to negotiations with the House. Leaders in both chambers aim to have a final package ready for the President's signature by the end of the year. Still, several policy and political questions remain.
In addition to the differences in bond and tax credit programs affecting infrastructure, the measures differ on provisions related to key housing deductions, state and local taxes, and the individual mandate for healthcare. Some Republican Senators are also likely to press for a variety of changes on the floor. Lastly, the package appears to trigger some other budget-related statutes that could have an impact on a range of mandatory spending, including subsidies for certain bonds and Medicare.
What's In the Two Bills
House Legislation Overview
Low Income Housing Tax Credit – Maintained
Advance Refunding of Municipal Bonds – Eliminated
Private Activity Bonds – Eliminated
Historic Tax Credit – Eliminated
New Markets Tax Credit – Eliminated
Mortgage Interest Deduction – Modified and capped at $500,000
State and Local Tax Deduction – Modified and capped at $10,000
Senate Legislation Overview
Low Income Housing Tax Credit – Maintained
Advance Refunding of Municipal Bonds – Eliminated
Private Activity Bonds – Maintained
Historic Tax Credit – Maintained; modified to apply over five years
New Markets Tax Credit – Maintained
Mortgage Interest Deduction – Maintained without new caps or changes
State and Local Tax Deduction – Eliminated
State and Local Tax (SALT)
One of the biggest hurdles for negotiators will be how to handle differences over the deduction for state and local taxes.
As noted above, the House puts a new cap on the deduction while the Senate eliminates it. Elimination of SALT makes passage easier in the Senate where those savings are used to offset lower rates. However, House Republicans from relatively higher tax states are opposed to elimination, and the GOP can't afford too many defections on a bill that will not attract Democratic votes.
The GOP's no votes on passage in the House were largely driven by concerns that the House cap is too low.
Beyond the politics, however, SALT changes would likely have an impact on local governments. It is the elimination of the deduction would likely it more difficult for communities to raise dedicated local taxes for key development and infrastructure initiatives. A growing number of communities rely on local funding to advance critical transportation initiatives.
As an example, just this past November voters in Denver approved the city's largest-ever bond package. While changes in SALT wouldn't prevent local action, it would likely increase the political pressure to reduce, not raise, local taxes.
Combined with the proposed elimination of various tax credits, local governments could face the dual challenge of higher project financing costs and lower public support for local revenue.
Pay As You Go (PAYGO)
Another headache for local governments related to tax reform could come in the form of a relatively obscure federal budget law known as PAYGO. The Pay As You Go Act of 2010 was enacted to ensure that any new spending during a congressional session would be offset by other budget cuts or new revenue. The Office of Management and Budget is required to keep score and make automatic cuts if necessary.
PAYGO potentially comes into play in the short term with the tax reform bill. The measure would trigger deficits. Supporters argue that long-term economic growth would offset these deficits. Regardless, the immediate fiscal year deficit impact would almost certainly require OMB to make cuts.
According to a Congressional Budget Office letter, an estimated $136 billion would need to be cut by January 15, 2018, unless Congress enacts a waiver or makes other changes.
Other PAYGO rules protect Social Security, Medicaid, and other safety net programs. This means that Medicare cuts would be necessary.
Of critical interest to local governments, federal direct subsidy payments for a variety of already issued bonds would be in jeopardy, including Build America Bonds, renewable energy direct pay bonds, and Qualified School Construction Bonds. Because these are already issued, locals would be on the hook to make up the difference.
It's unlikely Congress would let PAYGO cuts happen automatically, but the challenges of getting around PAYGO make the political calculus that much more complicated.
Next Steps
Capitol Hill is slated to get back to work next week. Tax reform will likely head to the Senate floor. It's also likely that Senate leaders will be in heavy negotiation mode on modifications and amendments to the committee-approved version that would get them to 50 votes. At the same time, conversations will be unfolding with the House to find a compromise.
These dueling negotiations will unfold as Congress also faces an early December deadline for Fiscal Year 2018 funding. Expect a busy and bumpy year-end ride on Capitol Hill.
Top image: U.S. income tax forms. Photo by Flickr user Chris Potter (CC BY 2.0).