WASHINGTON -- The tax exemption for municipal bonds would be fully retained but the federal deduction for state and local taxes would be repealed under the Republican plan for tax reform.

While these provisions do not appear in the nine-page plan released on Wednesday, senior administration officials confirmed them for The Bond Buyer on Tuesday.

The plan also would eliminate the alternative minimum tax. This would benefit private activity bonds which typically have higher yields because they are subject to the AMT and are therefore less attractive to higher-income individuals.

The plan would shrink the current seven tax brackets, which range from 10% to 39.6% to three brackets, with rates of 12%, 25% and 35%. There would be flexibility to add a fourth rate for the wealthiest taxpayers.

Top congressional Republicans who plan to unveil their outline at the U.S. Capitol Wednesday afternoon would offset the elimination of SALT by increasing the standard deduction for individuals to $12,000 and for couples to $24,000.

Top congressional Republicans are unveil their framework for tax reform at the U.S. Capitol.
Top congressional Republicans are unveil their framework for tax reform at the U.S. Capitol. Joe Sohm

President Donald Trump also plans to talk about the tax reform framework during a speech in Indianapolis.

The maximum tax rate that can be applied to the business income of small and family owned businesses conducted by sole proprietorships, partnerships and S corporations would be 25%. The corporate rate would be reduced to 20%.

The plan would allow businesses to immediately write off or expense the cost of new investments in depreciable assets other than structure made after Sept. 27. The deduction for net interest expense incurred by C corporations would also be partially limited, but rates were not provided.

The tax reform framework, Republicans say, is only an outline that will be fleshed out by the two tax-policy committees in Congress during the coming weeks.

A proposed cap on the corporate interest deduction could lead to a lower tax rate for interest income for individuals, which would significantly reduce the demand for municipal bonds. That offset provision was in a House Republican plan released last year as part of their “A Better Way’’ agenda.

The document released on Wednesday said, "The committees will consider the appropriate treatment of interest paid by non-corporate taxpayers.''

Republicans say the plan would retain the deductions for mortgage interest and charitable contributions as well as tax credits for research and development and low-income housing.

The U.S. Conference of Mayors sent a bipartisan letter Monday signed by 130 mayors urging Congress to not eliminate SALT.

“According to a recent report by the Government Finance Officers Association, if the SALT deduction is eliminated, almost 30% of taxpayers - including individuals in every state and in all income brackets - would be adversely impacted,’’ the mayors wrote. “This would include over 43 million tax units representing well over 100 million Americans.”

John Buckley, former chief tax counsel of the House Ways and Means Committee, said he expects a repeal of the SALT deduction will be a controversial issue for many House Republicans.

“Many Republicans would have to vote against their states and local governments to repeal SALT,’’ Buckley said.

Republican opposition in the House to eliminating the SALT deduction has been led by lawmakers from New York and New Jersey. Their states are among those with the highest state and local taxes in the nation.

“This plan should concern all taxpayers who itemize, including those who claim the mortgage and charitable deductions, because the loss of SALT will mean fewer households will be able to claim any deductions in the future,’’ Americans Against Double Taxation said. “Taxpayers should not be lulled into a false sense of security as this proposal threatens all itemized deductions, even though its direct focus is on SALT.”

Justin Underwood, director of the Municipal Bonds for America Coalition, said his organization was encouraged by reports that the tax-exemption of municipal bonds is being fully retained.

“However, we remain fully engaged with Congress to defend the value of the tax-exemption for municipal bonds to ensure that the benefits of the exemption to municipalities, U.S. infrastructure, and investors remains unaffected during the legislative process for tax reform,’’ Underwood said.

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