Federal Tax Reform Bill to Impact Cities

The proposal’s elimination of various tax exemptions and credits would have a negative impact on cities.
(Published Nov 6, 2017)

U.S. House Republicans released a tax reform bill on Nov. 2 that contains significant changes to the tax system, including a reduction in the number of individual income tax brackets, a general lowering of the rates, and the elimination of deductions and personal exemptions. In addition, the proposal includes a reduction and simplification of the corporate income tax system.

The bill, H.R. 1 (called the “Tax Cuts and Jobs Act”), includes a variety of provisions that would impact cities.

Direct impacts
The following measures in the bill will directly impact cities.

Private activity bonds. Although the proposal preserves the tax-exempt status of interest earned on traditional municipal bonds, it eliminates the tax-exempt status for newly issued private activity bonds (PABs). This change will increase the cost of qualified projects and programs financed with PABs such as infrastructure, affordable housing, economic development, and the funding and refinancing of student loans.

PABs help spur private investment and allow state and local governments to harness the private sector’s experience and expertise toward public projects and initiatives.

Under the proposal, interest on newly issued PABs would be included in income and thus subject to tax. The provisions would be effective for bonds issued after 2017 and, therefore, the change in the tax status of PAB interest would not apply to any previously issued bond, nor would the provisions prevent state and local governments from issuing PABs in the future. The proposal would simply remove the federal tax exemption for newly issued bonds.

Advance refunding bonds. Under the bill, interest on newly issued advance refunding bonds (refunding bonds issued more than 90 days before the redemption of the refunded bonds) would be taxable. Interest on current refunding bonds would continue to be tax-exempt. Similar to the change in tax status of PABs, the provision would be effective for advance refunding bonds issued after 2017.

The loss of the tax-exempt status of advance refunding bonds would have a direct, negative financial impact on any city seeking to issue such bonds because advance refundings are undertaken by governmental issuers to achieve debt service cost savings, notably during economic downturns.

Historic tax credit. The House tax reform plan repeals the historic tax credit (HTC). The HTC provides a financial incentive for the preservation and redevelopment of historic and abandoned buildings. According to the National Trust for Historic Preservation and the National League of Cities, HTCs have been used to renovate more than 40,000 structures and leverage more than $117 billion in private investment since being enacted in 1981.

Under a transition rule in the House tax plan, the credit would continue to apply to expenditures incurred through the end of a 24-month period of qualified expenditures, which would have to begin within 180 days after Jan. 1, 2018.

New markets tax credit. The House proposal suspends the allocation of additional new markets tax credits (NMTC) after 2017. However, credits that have already been allocated may be used over the course of up to seven years.

The NMTC was originally designed to increase the flow of capital to businesses and low-income communities by providing a tax incentive to private investors. According to the National League of Cities, over the last 10 years, the NMTC has proven to be an effective, targeted, and cost-efficient financing tool valued by businesses, communities, and investors across the country. The NMTC was previously set to expire on December 31, 2019, although separate bills to extend the program have been introduced in both the Senate and House.

Indirect impacts
The following measure in the bill will indirectly impact cities.

State and local tax deduction. The House tax plan roughly doubles the standard deduction for individual income taxes while eliminating several of the current eligible deductions, including the itemized deduction for state and local income and sales taxes. However, the proposal retains a limited deduction for up to $10,000 of local property taxes.

The modifications to the standard deduction and changes to the deductibility of state and local taxes could increase the tax liability for some taxpayers, which could impact the future taxpayer acceptance of state and local budget and tax increases.

Status and action
Congressional leaders have suggested that they intend to approve and pass a tax reform package to the president before the end of the year.

The Senate is expected to release its version of a tax reform package in the near future. The House will begin committee consideration of its tax proposal as early as this week, and committee actions could modify the parameters of the House proposal.

Contact your U.S. representative and senators to express concerns about any of these changes.

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