NYC assesses the damage from the new tax law
New York City’s economic health is under threat from a variety of provisions in the Tax Cut and Jobs Act passed by Congress last year, officials testified at a City Council Finance Committee hearing at City Hall Monday.
Officials estimated the law's ban on advance refundings would cost the city $425 million in savings over four years and said changes in state law were needed to offset the damage to city finances from the new limit on the state and local tax deduction.
Councilperson Daniel Dromm, chair of the committee that held the oversight hearing on the effects of the recent federal tax law changes, said some of the new law’s effects are only just starting to become apparent.
“Throughout the process leading to the enactment of the TCJA, Congress considered several provisions that would have affected the market for municipal bonds and the financing of affordable housing,” he said. “The House of Representatives originally targeted private activity bonds, a significant source of financing of affordable housing development in New York City (over 49,000 units of affordable housing in the city were financed by such bonds between 2005 and 2013) by proposing to remove the exemption from federal income tax for all interest paid/earned on the bonds.”
He added, “However, the final version of the TCJA retained the exemption for private activity bonds. The TCJA did eliminate tax-exempt advance refundings of governmental and 501(c)(3) debt after Dec. 31, 2017.”
The city has about $37.7 billion of general obligation debt outstanding. Moody’s Investors Service rates the city’s general obligation bonds Aa2, while S&P Global Ratings and Fitch Ratings rate them AA. All three assign stable outlooks.
Dromm said that one program that remained unchanged was the Low-Income Housing Tax Credit, which gives state and local agencies the equivalent of about $8 billion in annual budget authority to issues tax credits for the acquisition, rehabilitation or new construction of rental housing targeted to low-income households.
Preston Niblack, NYC Deputy Comptroller for Budget, told the panel that Comptroller Scott Stringer’s analysis shows about 475,000 mostly middle-class federal taxpayers in the city would face higher tax liabilities under the TCJA.
“The capping of the state and local tax (SALT) deduction at $10,000, and the elimination of certain other deductions, is the most common reason,” he testified. “We estimate that roughly half of taxpayers earning between $100,000 and $500,000 in income are likely to face higher tax bills.”
Michael Hyman, First Deputy Commissioner at the city’s Department of Finance testified that the SALT cap would sting many city taxpayers.
“DOF and [the Mayor’s Office of Management and Budget] predict that the combined impact or the [TCJA provisions] will increase the Federal taxes an average of 8% on hundreds of thousands of New York City residents, the majority of whom have incomes below $100,000. A primary reason is the $10,000 limit on the SALT deduction."
He added that IRS data show Manhattan is the top county nationwide in terms of SALT deductions, with an average deduction of almost $24,000. Among states, New York ranks second.
George Sweeting, Deputy Director of the city’s Independent Budget Office, testified that the SALT caps would hurt the city’s finances in the short-term, but may not be as dire as some critics have suggested.
“Capping SALT deductions at $10,000 poses long-term threats to the city and state economies and will have immediate consequences for many city taxpayers,” he said. “But the number of taxpayers affected may be less than frequently discussed.”
Sweeting added that the TCJA holds both good and bad news for city residents.
“The act will affect most New York City taxpayers in diverse ways, some positive and some negative. It also brings significant economic and fiscal risks for New York City and New York State,” he said.
“Some of these problems are readily addressed by straight-forward changes to the personal and business income tax laws of the city and state. Others could require more significant changes to our tax system that would benefit from careful vetting and analysis before proceeding, particularly because many of the taxpayers who are negatively affected are benefiting from other provisions in the act,” Sweeting said.
Niblack said that the tax bill also raises a number of concerns for the long-term economic competitiveness for high-tax jurisdictions like New York.
“First, because of the cap on SALT deductions, the difference in top marginal tax rates between high-tax and low-tax states has widened,” he said. “The ability to deduct state and local taxes on your federal return prior to this year meant that your effective state and local tax rate was lower than your nominal rate. That is now no longer the case, with state and local tax rates effectively a third higher than they were.”
Next week, the City Council will begin hearings into Mayor Bill de Blasio’s $88.67 billion preliminary fiscal 2019 budget and the Council will be looking at how reserves can be buttressed against any possible negative fallout from the TCJA.
According to the February Financial Plan Detail released by the Mayor's Office, the TCJA altered the federal and person income tax in such a way that the city will be impacted by the changes.
"New York City uses federal income as the starting point to determine New York City liability for both the personal income tax and and the business corporation tax," the plan said. "As a result the Federal changes will have potential flow-through effects on revenues that will need to be assessed. Such effects ate not currently included in the tax forecast."
Hyman also testified that the new tax law will impact would fall heavily on city finances.
"The Federal tax act has a direct and negative impact on the city budget," he said. "For example the act eliminated tax-exempt advance refunding bonds, which may cost us up to $425 million in savings over the next four tears and increase the cost of repairing roads, bridges and other critical infrastructure."
He added that the law would also hit the city indirectly "lowering the corporate tax rate to 21% devalues low-income housing tax credits, which could impact our affordable housing plan by some $200 million annually.
Last week, City Comptroller Scott Stringer said the budget cushion in the preliminary fiscal 2019 budget is not enough to ward off any problems that could be caused by the TCJA.
Stringer said that the city’s projected budget cushion -- the budget resources available at the beginning of each fiscal year to help the city weather unexpected events – is currently insufficient. At 9% of adjusted FY 2019 spending, it is under the optimal range of between 12% and 18% of spending.
Sweeting said that Gov. Andrew Cuomo has made several proposals to help mitigate the negative effects of the TCJA.
“The governor’s 30-day amendments include two proposals for limiting the effect of the SALT change for the Federal tax liability of New York residents," he said. "One would create trusts to receive donations from state and local taxpayers of payments for various public purposes … Taxpayers would then receive a new state tax credit equal to 85% of the donations made to such trusts. Because charitable contributions remain deductible for federal tax purposes, taxpayers would regain much of the benefit they had previously received through the SALT deduction. It remains to be seen whether the Internal Revenue Service would be willing to treat such donations as legitimate charitable donations,” he said.
“The second proposal by the Governor would create a new optional employer payroll tax in the state," Sweeting said. "The tax would be 5% wages of employees who earn over $40,000. The employees would then receive a credit for the tax paid by their employers to be used against their state personal income tax. Because payroll taxes remain deductible for federal business taxes, employers would be held harmless. There are several potential complications that could undermine how well such a system works, not to mention the question of whether the federal government would allow it to stand.”
Niblack said, “the legislature will need to make similar changes at the city level as well, which the mayor’s preliminary budget assumed will happen. Without these changes, city taxpayers will face an increased tax bill of some $365 million, by our estimate.”
Sweeting said the nonpartisan Tax Policy Center had analyzed the distributional effects of some possible spending reduction plans and found that the combined effects of the act and potential spending reductions range from regressive to extremely regressive.
"If such federal spending reductions are enacted, demands to replace the federal dollars would present very difficult choices for both New York City and State,” he said.