CSAC Bulletin Article

House Approves Major Tax Reform Bill
Senate Action Expected After Thanksgiving Holiday

November 16, 2017 

The House of Representatives approved a major tax reform bill (HR 1) today that, if ultimately signed into law, would deliver President Trump and congressional Republicans their first signature legislative achievement of the 114th Congress.  As expected, a number of Republican defectors joined House Democrats in opposing the bill. In the end, 227 Republicans voted for the legislation, with 13 members of the GOP – including Representatives Darrell Issa, Dana Rohrabacher, and Tom McClintock – aligning with 192 Democrats in opposition.  Two House Democrats did not cast votes.

The version of the tax reform bill approved today still contains the provisions opposed by CSAC and a coalition representing California local governments, school boards, economic development organizations, and realtors.”

Although most facets of the complex tax overhaul, known as the Tax Cuts and Jobs Act, were embraced by rank-and-file Republicans, several major sticking points caused infighting among the GOP.  For starters, plans to significantly scale back the State and Local Tax (SALT) deduction were met by fierce resistance from a number of Republicans from high-cost, high-tax states.  Specifically – and in order to pay for some of the corporate and individual tax breaks that are included in the GOP plan – HR 1 would eliminate the deduction for income and sales taxes and cap the deduction for property taxes at $10,000.

It should be noted that California has the highest top income-tax rate in the nation along with one of the lowest personal property tax rates.  Accordingly, the loss of the SALT deduction would be particularly detrimental to taxpayers in the state.  In 2015, more than 5 million California households were able to deduct nearly $80 million for local income taxes.  Moreover, the average deduction for state and local income taxes alone totaled nearly $16,000 per return, while state and local property taxes averaged less than $6,000.  All told, 79 percent of California taxpayers who received a benefit from the state and local income tax deduction were families earning less than $200,000 in annual household income.

In addition to SALT, there are several other provisions of HR 1 that are of direct interest to California’s counties, including provisions that would curtail local government’s ability to finance key infrastructure projects.  For example, the House bill would eliminate the tax exemption for advance refunding bonds.  Under current law, advance refunding – which represents approximately half of the bond market in California – allows counties to refinance outstanding bonds to take advantage of better terms and rates.

HR 1 also would eliminate the tax exemption on newly issued Private Activity Bonds (PABs).  These bonds are widely used to attract private investment for infrastructure projects that have a direct public benefit, such as affordable housing units, hospitals, and schools.  The House bill would not alter the tax-exempt status of municipal bonds, except in the case of bonds that are used to finance professional sports stadiums.

Across Capitol Hill, the Senate Finance Committee continued to debate its own tax-reform plan throughout the week of November 13.  With a number of amendments still pending at press time, the committee was expected to continue its work into the weekend.  Senate floor consideration is slated to occur the week following the Thanksgiving break.

In a sign that the Senate tax bill could be facing trouble, one Republican senator – Ron Johnson of Wisconsin – recently declared his opposition to the upper chamber’s tax plan.  Johnson has indicated that, in its current form, the plan doesn’t offer sufficient benefits for so-called pass-through businesses.  As was the case with earlier efforts aimed at repealing the Affordable Care Act (ACA), Republicans can only afford to lose two votes if they are going to advance their reform plan.

Incidentally, GOP leaders agreed earlier this week to include repeal of the ACA’s individual mandate in their tax package.  According to the Congressional Budget Office, eliminating the requirement that individuals have health coverage would save the federal government more than $300 billion over 10 years but would leave millions of Americans uninsured.  One GOP senator – Susan Collins of Maine – has already signaled her displeasure with the addition of the ACA language.

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