As you may recall, in our August 4 Weekly Update we alerted you to the possibility that Federal Income Tax reform could jeopardize two provisions of the Tax Code that are vital to New Jersey taxpayers and New Jersey municipalities. Those are the deductibility of interest earned on municipal bonds (First highlighted, this year, in our February 3 Weekly Update.), and the state and local tax (SALT) deduction. (Most recently discussed in our September 15 Weekly Update.)
On Wednesday, the result of weeks of discussions among the White House, the Senate Majority Leader, the Speaker of the House and the Chairs of the respective House and Senate tax-writing Committees was released as the “Unified Framework for Fixing Our Broken Tax Code” (the Framework).
This nine-page document provided some details that were missing from the Administration’s earlier one-page statement of principles. (See our April 28 Weekly Update for information on that.) It makes no specific mention, however, of the future of the municipal bond and the SALT provisions. Instead, it directs the House and Senate tax-writing committees (the House Ways and Means Committee and the Senate Finance Committee) to ‘develop legislation through a transparent and inclusive committee process,’ which would (among other things) close ‘special interest tax breaks and loopholes’ in order to recover some of the revenue that would be lost by lowering rates and expanding a small number of deductions for individuals and corporations.
The goal is to eliminate many tax breaks, in order to simplify the tax code and to help pay for lowering tax rates. The Framework calls for significantly increased standard deductions, specifically allowing itemized deductions for mortgage interest and charitable giving.
Some budget analysts estimate that the tax cuts included in the Framework could decrease government tax revenue by more than $5 trillion over 10 years. The elimination of other, yet to be specified, itemized deductions will be needed to offset some of that loss, and to ease the impact that it would have on the deficit and on continued funding for vital federal programs and services.
The tax code is incredibly complex and every one of its provisions was enacted for a reason. While some of those reasons may no longer serve the public’s interest, others remain fair and effective tools that promote the general welfare and serve legitimate public interests.
For more than a century, states and local governments have depended on the issuance of municipal bonds for essential capital projects. The federal income tax exemption of the interest earned on those bonds has kept the cost of issuance well below other investment options. It has allowed for vital investments in our public infrastructure, at a discount to those taxpayers. Loss of that advantage would force municipalities and states to increase rates of return, in order to compete with other investment opportunities. That, in turn, would increase a local government’s costs that would, ultimately, be shouldered by our property taxpaying residents and businesses.
Nearly two-thirds of core infrastructure investments in the United States are financed with municipal bonds. In 2015 alone, more than $400 billion in municipal bonds were issued to finance these vital projects. These are the pro-growth investments which spur job creation, help our economies grow, and strengthen our communities. A combination of local control and local responsibility makes municipal bonds an incredibly effective and efficient tool.
Over the last decade, overall state and local borrowing has actually declined in proportion to the economy, while still financing more than $2 trillion in new infrastructure investments. And, if simply left alone, municipal bonds likely will finance another $3 trillion in new infrastructure investments by 2026. Keeping infrastructure costs low is critical to job creation and to the infrastructure investments that are the backbone of our economy Savings from affordable financing through tax-exempt bonds allows for greater infrastructure investments and savings passed directly to taxpayers and ratepayers in the form of reduced taxes and fees.
At our Annual Conference, last November in Atlantic City, the members of the League unanimously endorsed a resolution calling on Congress to preserve this vital tool. The state and local tax deduction was one of six deductions in the original tax code in 1913. The principle that no government should tax another, strikes at the heart of federalism and any reversal would be an overreach by the federal government. This preemption would result in a double taxation and increase the constraints of local budgets due to a lack of revenue.
A Draft Resolution on SALT Deductibility is posted on our website, for your consideration.
Since the last comprehensive tax reform in 1986, the tax code has become increasingly complex and the need for streamlining is apparent. While we appreciate the need for reform, revenue neutrality should not be accomplished by preempting state and local governments taxing authority. Any effort that includes cutting these vital tools is short-sighted and would undermine the ability to meet the needs of the citizens’ local officials are sworn to serve.
Please contact Senators Menendez and Booker and your Congresswoman or Congressman and urge them to protect these vital provisions.
Jon Moran, Senior Legislative Analyst, email@example.com, 609-695-3481, x121;
Frank Marshall, League Staff Attorney, firstname.lastname@example.org, 609-695-3481, x137.