This week, the Trump Administration released its tax reform plan, billed as “the biggest tax cut and largest tax reform in our history.” If fully implemented, the plan would have lasting impacts on every sector of American life, including cities. The National League of Cities (NLC) recognizes the need for comprehensive tax reform. Since the last major overhaul in 1986, the system has grown overly complicated. Now is the time to create a fair, sound and economically-stimulating tax code that allows cities to thrive — but this plan raises major concerns for local governments nationwide.
The administration’s outline reduces the corporate tax rate to 15 percent from the current 35 percent level. Many on Capitol Hill fear such a low rate would contribute to a growing “mountain of debt” if it is not sufficiently offset by cuts to loopholes. On the personal tax side, a doubling of the standard deduction for individuals and married couples would be offset by the elimination of all itemized deductions, with an exception for mortgages and charitable donations. That includes the state and local tax deduction.
Unlike other federal deductions, the state and local tax is a mandatory payment — and removal would put pressure on localities to lower taxes, which constitutes a preemption of local taxing authority.
The local tax deduction is really a 100-plus year agreement with the federal government that gives local leaders — who represent the level of government most trusted by, and closest to, the people — the ability to generate the revenue they need without the fear of double-taxing residents and families. Cities are not a special interest loophole, and our tax policy should not treat them like one.
While we fight to save the state and local tax deduction, we also need to be mindful of another potential upcoming battle: the fight to protect the tax exemption for municipal bonds.
The tax plan did not mention or allude to the tax-exempt status of municipal bonds, but we still need to acknowledge the potential risk they face in the upcoming months. It is likely that any proposed changes to the tax-exempt status of municipal bonds would be rolled into an infrastructure plan.
Municipal bonds are an irreplaceable driver of success for cities. They serve as the primary method for state and local governments to finance more than two-thirds of the nation’s public infrastructure.
This country was built on municipal bonds. Over the past decade alone, this financing vehicle has paid for more than $2 trillion in infrastructure projects nationwide. Any alteration to the tax-exempt status could increase the cost of financing vital local projects by 25 to 30 percent. Increased costs for financing the expansion of schools, refurbishing of water treatment facilities, building of bridges and many other public projects would be passed onto the local tax payer.
We need tax reform — but federal tax cuts cannot come at the price of denying local leaders the ability to raise the revenues that rebuild main streets, keep streets safe, and support schools.
We call on Congress and the administration to create a comprehensive tax reform package that ensures local governments retain the authority to set their own tax policy and continue to drive the national economy.
About the author: Brett Bolton is the principal associate for Federal Advocacy (Finance, Administration and Intergovernmental Affairs) at NLC.