WASHINGTON – House Republicans passed a far-reaching overhaul of the nation’s tax system Thursday that would terminate private activity bonds and advance refundings after Dec. 31 as well as most of the deduction for state and local taxes.
The bill passed 227-205 mostly along party lines, despite 13 defections from Republicans mostly from high tax states who opposed the partial repeal of the deduction for state and local taxes. All 192 Democrats who voted opposed the bill. Two lawmakers did not vote.
“This is one of the most historic and biggest things we will ever do,” Speaker Paul Ryan, R-Wis. said as he closed four hours of the floor debate that began Wednesday.
Ryan predicted the legislation will lead to faster economic growth that will allow the United States to solve its problems, in part because the reduction in the corporate tax rate to 20% from 35% will encourage businesses to remain in the U.S.
Left unsaid by Ryan and other supporters of the bill is how it would create new challenges for the nation by closing the door to using private activity bonds in public private partnerships for major infrastructure projects and terminate lower cost financing for affordable housing, airports and nonprofits such as hospitals, YMCAs and museums.
The legislation would add $1.5 trillion in new deficit spending over 10 years, which the nonpartisan Congressional Budget Office estimated will total $1.7 trillion with the inclusion of debt service.
Democrats warned that the projected increase in federal debt will be a drag on economic growth and the biggest tax breaks will go to businesses and the wealthy. They predicted the higher earnings corporations would get from lower tax rates would be used for stock buybacks and executive bonuses rather than raising the wages of average workers.
Public benefit corporations would not fare well. Airports and public utilities would be among the many public sector organizations that would lose their ability to lower their borrowing costs through advance refundings.
Advance refundings, which Thomson Reuters has estimated as almost 27% of the municipal market last year, also are terminated in the tax bill the Senate Finance Committee is working to complete this week.
A floor vote on the Senate version is expected the week after Thanksgiving, followed by House and Senate negotiations to resolve their differences. Congressional Republican leaders hope to vote on the final legislation and send it to the White House for President Trump’s signature before Christmas.
The bill that Senate Republicans are moving without Democratic support would completely repeal the SALT deduction but keep PABs. The measure would keep the current deduction for interest on home mortgages of up to $1 million. Both bills would end the deductibility of home equity loans. The bill in the Senate Finance Committee would keep the mortgage deduction for second homes, but the House bill would not, Thomas Barthold, chief of staff of the nonpartisan Joint Committee on Taxation, told The Bond Buyer.
The only federal deduction for SALT retained in the House bill is up to $10,000 in property taxes paid by homeowners. The House also sets a $500,000 ceiling on new mortgage loans eligible for a mortgage interest deduction.
State and local groups have strongly opposed the SALT repeal, saying that it represents double taxation, would constrain the ability of localities to raise revenue and lead to lower property values.
The International Association of Fire Fighters and the National Association of Police Officers sent a joint letter to the House Thursday saying repeal of SALT threatens the ability of municipalities to make “essential investments that give our first responders the tools they need to get the job done. The Fraternal Order of Police made a similar case in a separate letter.
SALT is claimed by taxpayers who typically tally the cumulative amount of their state and local taxes, along with mortgage interest, property taxes and charitable donations on tax returns. The House bill make it unlikely homeowners will itemize given that the tax bill doubles the standard deduction.
House Republicans opponents were concentrated in the higher tax states of New Jersey, New York and California.
In the Senate, only Democrats represent those states.
Senate Majority Whip John Cornyn, R-Texas, told The Bond Buyer he will fight to keep PABs in the final tax reform bill when the Senate and House Republicans negotiate their differences next month.
“We’re going to have to work that out,” Cornyn said. “I’m going to be an advocate.”
Cornyn said he not only supports PABs, but also the public private partnerships that they are used for to finance infrastructure projects. PABs also have widespread support among House Republicans.
“Every healthcare facility that has been built at the University of Chicago has been built with private activity bonds,” Rep. Randy Hultgren, R-Ill., co-chair of the House Municipal Finance Caucus, told The Bond Buyer. “We’ve got this intermodal transportation facility in Joliet that does truck to rail and rail to truck that has thousands of jobs and it was done with private activity bonds.”
Hultgren said there were 167 House members who almost were even split among Republicans and Democrats signed a letter earlier this year in support of the tax exemption for municipal bonds.
The Trump administration is expected to weigh in on PABS and other issues next month during House-Senate negotiations after remaining publicly silent on details of the legislation during House and Senate committee deliberations.
Tom West, a Treasury Department tax legislative counsel who has attended the Senate finance deliberations, has declined to answer questions from Democrats on the administration on specific provisions of the tax bill.
Sen. Sherrod Brown, D-Ohio, told The Bond Buyer he isn’t surprised.
“They haven’t weighed in on anything yet this year,” Brown said in an interview. “They didn’t weigh in on health care except to say they wanted a bill. So I’m not surprised. This can’t happen without a Treasury and a White House that is engaged. That’s why it’s going to be so hard to do this. You need those players in the administration that simply don’t exist now.”
Brown traced the problem to Treasury Secretary Steve Mnuchin and National Economic Council Chairman Gary Cohn.
“Neither one has ever worked with Congress,” Brown said. “Mnuchin is bank foreclosure expert. He’s not a tax guy. Cohen is very smart. But they’ve never done this. They don’t have the expertise the Reagan people had 30 years ago.”
