Some version of tax reform may come online in May
Congressional Republicans have focused on comprehensive tax reform since gaining control of the House of Representatives in 2010. Now, with a Republican administration in place, tax reform has moved from a pipe dream to the front burner. For counties, tax reform could put at risk two major priorities: the tax-exempt status of municipal bonds and the state and local tax (SALT) deduction.
Tax-exempt municipal bonds have been a fundamental feature of the United States tax code since 1913 and remain the primary method used by states and local governments to fund public infrastructure projects such as roads, bridges, schools, hospitals and water infrastructure.
Over the past decade, state and local governments have financed $3.8 trillion dollars in infrastructure investments using municipal bonds. Any changes to their tax-exempt status — either a complete elimination or a cap on the exemption — would drive up the costs of financing critical infrastructure for both counties and taxpayers.
Also caught in the crosshairs of tax reform is the state and local tax (SALT) deduction. The SALT deduction, which was also included in the original 1913 tax code, allows taxpayers to deduct state and local taxes paid, including property and income tax, from their federal taxable income.
This deduction provides counties some measure of autonomy over their tax systems and incentivizes local investment in various services, including health, education and transportation. Eliminating or capping the SALT deduction would represent double tax ation on taxpayers and could greatly constrain policy options available to state and local governments.
Following the blueprint, A Better Way, set forward by House Speaker Paul Ryan (R-Wis.) last summer, House Ways and Means Chairman Kevin Brady (R-Texas) has been crafting a tax reform plan over the last few months. Brady’s legislation could be released as early as May, at which point the committee would hold hearings and mark-ups on the legislation.
House Republicans have set an ambitious timetable for completing tax reform, hoping to pass it before the August recess this summer.
However, following the debates over health care legislation earlier this spring, President Trump and his administration are taking on a greater role in the legislative process on tax reform. The White House anticipates releasing its own tax reform blueprint this spring — likely in the form of a plan or outline as opposed to legislative text — and insists it is “driving the train” on tax reform.
Competing proposals between the House and the White House could slow the tax reform process down. Additionally, many Republican senators have publicly expressed concerns about certain components of the House plan, further complicating its path forward.
NACo, in conjunction with other state and local government organizations, recently sent a letter to all members of Congress urging them to preserve both the tax exemption for municipal bonds and the SALT deduction.
