SALT Elimination and the County Impact of Federal Tax Reform
The U.S. Congress is currently debating the largest federal tax overhaul plan since 1986. Both chambers are proposing to eliminate vital public policy tools used by state and local governments to generate more than $1.2 trillion in new federal revenue.SALT Elimination: The County Impact
On Thursday, November 16, NYSAC staff attended a briefing at the National Association of Counties on the proposed tax reform bill and what it means for NY counties.
The U.S. Congress is currently debating the largest federal tax overhaul plan since 1986. Both chambers are proposing to eliminate vital public policy tools used by state and local governments to generate more than $1.2 trillion in new federal revenue.
There are two plans in Congress:
The House plan:
-Eliminates the State and Local Tax (SALT) deduction for individuals and families, with a minor exemption for the first $10,000 of property taxes, but retains it for corporations
-Eliminates Advancing Refunding Bonds, which is the technical term for public refinancing of tax-exempt municipal bonds – while corporations may refinance corporate bonds an unlimited number of times, municipal bonds may only be refinanced once during their lifetime
-Eliminates Private Activity Bonds (PABs) used to finance airports, ports, water and sewer, affordable housing and essential economic development infrastructure
The Senate plan:
-Fully eliminates the SALT deduction for individuals and families, but retains it for corporations
-Eliminates Advance Refunding Bonds, effective at the end of 2017
These changes are a bad deal for taxpayers and counties, but the impacts are particularly large in New York:
-Eliminating the SALT deduction hits homeowners in New York the hardest. This is true in Manhattan and in upstate New York. Under a framework like the Senate's plan, average homeowners across the country could see their taxes rise an average of $815. In a state like New York with higher income and property taxes, that average is likely much higher.
-Other changes in the House bill to the mortgage interest deduction would eliminate benefits for second homes, which help generate significant property taxes in many New York counties. For example, over 79 percent of homes in Hamilton County, N.Y. are second homes.
-Allowing the $10,000 deduction for property taxes is simply a mirage that does not help the middle class. Only 26% of middle income earners in New York would still be able to take the property tax deduction under the House proposal. Meanwhile, 82% of the top 1% of filers in the state would continue to benefit.
-Claims that eliminating SALT creates “fairness” among the states are also false. New York already sends $48 billion more to the federal government than they get back. Eliminating SALT would only increase that discrepancy.
-Eliminating advance refunding bonds will increase infrastructure costs on New York counties and taxpayers substantially. From 2012-2016, 253 advance refunding bonds were issued by municipalities in New York, saving counties and taxpayers $764 million dollars over that time.
New York State county officials were joined by county officials from across the country who attended a meeting at the White House with the Administration's top advisors that included: Gary Cohn, Director of the National Economic Council; Linda McMahon, Administrator of the Small Business, and Sonny Perdue, United States Secretary of Agriculture.
HR1 – House Tax Reform Bill (11-2-17 draft)
Earlier this month, the House released the first draft of its tax reform bill. It proposes sweeping changes to the existing tax code with the goal of lowering federal income taxes for most households and simplifying the process of filing individual taxes. The bill also permanently lowers the corporate tax rate from 35 percent to 20 percent, partially paid for through the elimination of a variety of business deductions, credits and exemptions. Overall, the tax bill would increase the federal deficit by $1.5 trillion over 10 years as allowed under the adopted budget resolution.
Individual Taxes (cumulative net impact of $930 billion in lower taxes over 10 years)
Simplifying individual income taxes is largely accomplished by reducing the number of tax brackets from 7 to 4 and doubling the standard deduction (for a married couple from $12,600 to $24,400). However, this is paid for by eliminating personal exemptions ($4,050 per person and dependent) and eliminating, or capping, a host of other deductions including eliminating the deduction for state and local income taxes, capping the property tax deduction at $10,000, limiting the mortgage interest deduction on future transactions to the first $500,000 of mortgage debt (the current limit is $1,000,000), eliminating the deduction for student college debt, medical expenses, adoption expenses, casualty losses, moving expenses, dependent care expenses, hybrid and electric vehicles, among others. The doubling of the standard deduction, combined with the elimination of itemized deductions can also have the impact of completely nullifying the value of the deductions that do remain such as mortgage interest, charitable contributions and partial property taxes paid if they are not more than $24,400. This can raise taxable income, as well as total taxes paid, for some families compared to current law.
The elimination of deductions is partially offset by an increase in the child tax credit from $1,000 to $1,600, with income eligibility expanded from $115K to $230K. The bill also includes a temporary dependent (generally you and your spouse) tax credit of $300 per dependent that expires in tax year 2023. The impact on an individual household will depend on income, household size and the number of tax deductions and exemptions currently utilized that will no longer be available. While lower tax rates are part of the proposal and income brackets have been expanded – the lower tax rates might not make up for the lost tax deductions and exemptions. It is clear that lower and middle income households, in states with higher home values and higher state and local taxes (like New York), will not benefit as much as states that do not have those characteristics – some may actually pay more.
Based on the estimated revenue effects of the various proposals as detailed by the Joint Committee on Taxation, the proposal will undoubtedly create winners and losers depending on household circumstances. Major proposals are highlighted below.
Tax Increases (+$2.9 trillion over 10 years)
$1.56 trillion from repealing personal exemptions (impacts all filers)
$1.25 trillion from eliminating state and local income tax deduction, capping property tax and mortgage deductions (in NYS about 34 percent of tax filers itemize, average claimed is nearly $37,000 – highest in the nation)
$207 billion from other actions
Tax Cuts (-$3.96 trillion over 10 years)
-$1.1 trillion from lower tax rates and expanded income brackets (impacts all filers)
-$913 billion from doubling the standard deduction (in NYS about 66 percent of tax filers use the standard deduction rather than itemize)
-$450 billion from reducing business income passed through to individuals (in NYS 79 percent of all such business income reported is from individuals with income in excess of $500,000 – per a recent State Comptroller report)
-$430 billion from enhanced child tax credit (currently, 12 percent of NYS filers receive this credit – per OSC report – this percent will grow under the new proposal)
-$210 billion from temporary dependent tax credit (impacts all filers)
-$695 billion from repealing the alternative minimum tax (5.3 percent of NYS tax filers are subject to the AMT, per OSC report)
-$171 billion from modifying then repealing the estate tax (in NYS, 431 estates paid estate taxes in 2015, equaling $1.9 billion)
Corporate Taxes (cumulative net impact of $846 billion over 10 years)
The bill proposes to permanently reduce the corporate tax rate from 35% to 20%, this is partially paid for by eliminating a variety of current business deductions and exemptions such as limiting net interest deductions to 30% of adjustable taxable income, modifying the net operating loss deduction, repealing the deduction for domestic production activities, repealing the credit for clinical testing expenses for certain drugs for rare diseases, terminating private activity bonds, among other items. The tax bill also assumes new revenue will be generated through a one-time repatriation of foreign income through a 12 percent tax on that income coming back to the U.S. Another major source of revenue is the creation of an excise tax on outbound related-party payments (non-arms-length transfer payments).
New York is often referred to as a donor state in that it sends more federal tax revenue to Washington then it gets back in federal outlays. This negative balance, in effect, reduces the state's gross domestic product (GDP). When these “surplus” tax revenues are redistributed to other states by Washington through federal outlays it boosts the GDP of the receiving states. In 2015, New York sent nearly $50 billion more to Washington than it got back. It is unclear how this this balance of payments gap will change for New York overall under the new tax plan.