Don’t Make Cities and Towns Shoulder the Cost of Tax Reform

November 13, 2017 - (6 min read)

This is a guest post by Sam Mamet, executive director of the Colorado Municipal League.

Back in the day, when I was still lobbying for the Colorado Municipal League under the Gold Dome of our state capitol, there was an old parlor game I used to have to play. It was called “Shift and Shaft.” The game was pretty easy to follow: The legislature would try to pass something either preempting or restricting the ability of cities and towns (that was called The Shift), and then municipal leaders would be left holding the bag (that was called The Shaft).

People attributed the term to me, and I am happy to take credit. Fortunately, it does not play out as much at the State Capitol these days. We have a strong and positive partnership with state lawmakers. I, for one, appreciate that. A dozen lawmakers at the moment once even served as municipal leaders, and many were active within CML.

However, in Washington, I am sad to say, the game of shift and shaft goes on a lot more, this time under the guise of tax reform.

[blog_subscription_form title=”Subscribe to CitiesSpeak” subscribe_text=”Get the essential news and tools for city leadership, delivered daily by email.” subscribe_button=”Submit”]

Last week, the House Ways and Means Committee released its long-awaited “Tax Cuts & Jobs Act” plan. The proposed tax reform plan aims to streamline the U.S. tax code and create some tax relief for middle- and low-income Americans by reducing the number of tax brackets and marginal tax rates, while expanding family tax credits.

Unfortunately, these cuts are paid for on the backs of the state and cities and towns in Colorado. Here are five things you need to know.

  1. The overall municipal bond exemption appears not to be affected, BUT. There is an exemption for municipal bonds in the federal tax code. It is a top priority for Colorado municipal leaders to protect it. Currently, the overall tax exemption for municipal bonds is not altered. But …
  2. Other types of bond financing are seriously threatened. The tax exemption for newly issued private activity bonds (PABs) is eliminated. This includes financing for important qualified projects and programs, such as affordable housing, economic development, hospitals, educational and cultural facilities, single-family mortgage bonds, single and multifamily housing, and much more. They help spur private investment and allow you to harness the private sector’s experience and engage in numerous public-private partnerships. Part of the PAB annual allocation is overseen by a committee within the Colorado Department of Local Affairs (DOLA), and the Colorado Housing Finance Authority (CHFA) oversees the allotment of multifamily and single-family housing PABs. The plan also repeals the advance refunding of bonds which are done to achieve interest savings. This makes no sound fiscal sense.
  3. Pass the SALT I: The property tax deduction survives, but is capped. The National League of Cities (NLC) was able to convince the House leadership from proposing a complete elimination of the state and local property tax deduction (SALT, state and local tax deduction). The plan right now proposes permitting a deduction of property taxes up to $10,000. NLC maintains that any reduction to property tax deductions hurts local taxing control. This could hurt property tax dependent local governments in Colorado, such as school districts.
  4. Pass the SALT II: Deductions for state and local income and sales taxes (the rest of SALT) is axed. Colorado is not now, nor has it ever been, a high tax burden state by virtue of every statistic available. However, we are a high local sales tax burden state. Cities and towns rely more on the sales tax than municipalities in most other states. We are able to levy the sales tax at a rate higher than the state’s, and for many municipalities on a base more expansive than the state base. It is why we rely less on state-shared revenues. This proposal hangs us out to dry, period.
  5. Some key tax credits for cities also are eliminated. The Historic Preservation Tax Credit (HTC), which encourages the redevelopment of historic and abandoned buildings, is slated for elimination, along with New Markets Tax Credits (NMTC), which are used to increase the flow of capital to businesses and low income communities by providing a modest tax incentive to private investors. CML supports the preservation of key tax credits such as HTC and NMTC that help revitalize communities. The federal HTC is leveraged with a Colorado HTC, and often is coupled with the historic preservation grants program keyed off of limited stakes gaming in Colorado. Historic preservation programs throughout the state will be dealt a serious blow. The NMTC has been used by several cities in the state to leverage local revitalization efforts through their urban renewal programs.

This is a 429-page bill, the devil is very definitely in the details and fine print. Colorado’s tax base is coupled to that of the federal base. One of the things being altered is the estate tax, and this could have revenue implications for the state’s budget.

And remember, we have TABOR to contend with as far as addressing revenue losses that might be caused by federal tax modifications. The House Ways and Means Committee (no member of Colorado’s delegation sits on this committee) will likely finish mark up by the time you read this. A vote in the U.S. House is likely during the week of Nov. 13. And, that same week, the Senate Finance Committee is expected to markup and report its version of tax reform. Sen. Bennet is a member of that committee. December will be a critical month to reconcile differences and then to attempt to pass something to President Trump.

So welcome to Washington’s version of Shift and Shaft. I don’t like it, and neither should you. If you’re in Colorado, please contact Sens. Bennet and Gardner and the members of our House delegation: Reps. Buck, Coffman, DeGette, Lamborn, Perlmutter, Polis, and Tipton. Go to the federal issues link of our web page for their contact information. If you’re in another state, contact your state league for help.

Keep me posted on the results of your contact, and let’s hope we can shelve Shift and Shaft for another day.

Staff_MametS.jpgAbout the Author: Sam Mamet is the executive director of the Colorado Municipal League.