Tax bill could put fiscal strain on public finance, states, localities

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WASHINGTON – The House Republican bill under consideration by the House Ways and Means Committee, if passed, could put fiscal strain on the public finance sector and some state and local governments, Fitch Ratings said on Monday.

The bill’s proposed termination of private activity bonds “would likely lower the interest in and feasibility of public-private partnerships, which have increasingly been used to procure transportation projects,” Fitch said.

The proposed halt to PABs “would raise airport financing costs and possibly cause a reduction in private participation in water projects,” the rating agency said.

The termination of 501(c)(3) bonds “would lead to an incremental increase in borrowing costs and, eventually, slow issuance for the nonprofit health care sector,” Fitch said, adding however that it doesn’t see resulting downgrades.

The bill would limit the federal deductibility of property taxes to $10,000 annual while other state and local taxes would be deductible only for households with incomes under $400,000.

The bill “could limit tax raising flexibility, particularly for the states that charge higher taxes, as it would substantially reduce the federal tax deduction for state and local taxes,” the rating agency said. “This would cause an increase in the impact of state and local taxes, as they would be without an offsetting federal deduction.”

Residents in high-tax states such as California, Connecticut, Massachusetts, New Jersey and New York, would be most affected and might have less tolerance for higher taxes going forward, Fitch said.

“Most states are not in a position to lower taxes in response to the federal tax increase due to tepid revenue growth and ongoing spending pressures,” the rating agency noted.

The bill would preserve the mortgage interest deduction for existing mortgages but provide it only for newly purchased homes up to $500,000.

“If the bill’s proposed changes to the deduction of the mortgage interest and the cap on the deduction of property taxes reduce the incentive to buy houses, assessed property tax values in areas with high average home prices could see lowered growth or even decline and reduce the amount of property tax that local governments collect, Fitch said.

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