WASHINGTON -- The potential loss of the state and local tax deduction and advance refundings in the Senate tax reform proposal has municipal market groups, including mayors, gearing up to lobby the Senate Finance Committee for changes.
The 20% corporate tax rate also would have an adverse impact on the muni market, reducing corporate demand and transforming it into a largely retail market for individual investors.
Much of the outpouring of criticism Friday came from state and local groups that are worried the Senate will be less receptive than the House to their argument for keeping the SALT deduction.
None of the Senate Republicans represent high tax states such as New York, New Jersey, Connecticut, California and Maryland.
That wasn’t the case in the House, where a partial compromise on SALT was struck to allow homeowners to continue to deduct up to $10,000 in property taxes.
Senate Minority Leader Chuck Schumer of New York has publicly said any chance of saving the SALT deduction lies with Republican House members who represent wealthy suburban districts that would be hardest hit by the loss of the deduction.
And that’s where Schumer has focused his appeal. “The House bill would reduce the value of state and local deductions by 70% while the Senate bill eliminates it entirely,” Schumer said in Senate floor speech Thursday. “So this should be a three-alarm fire for every House Republican in California, New York, New Jersey, Virginia, Washington, Illinois, Colorado, and Minnesota. Senate Republicans are telling House Republicans there’ll be no compromise on state and local deductibility. It’s full repeal of bust.”
Senate Republicans needed the revenue from the repeal of the SALT deduction to pay for other tax rate reductions, Schumer said.
SALT supporters are nonetheless making their case to the Senate.
“The Senate repeal of SALT violates the promise that tax reform would provide relief for middle class families,” New Orleans Mayor Mitch Landrieu, president of the U.S. Conference of Mayors said after the release of the Senate plan. “Instead the proposal would tax these families twice on the same income.”
Mayors and other local government groups such as the Government Finance Officers Association also are decrying the proposed termination of advance refundings, which Thomson Reuters estimated to by almost 27% of the municipal market last year.
The Bond Dealers of America, the National Association of Bond Lawyers and the Municipal Bonds for America Coalition all said Thursday they will plead their case with the Senate.
“Our work is more difficult with regard to advance refunding bonds since they were eliminated in both proposals,” said Jessica Giroux, deputy director of governmental affairs for NABL. “Our job there is to educate, educate, educate. Because the ability to advance refund outstanding bonds provides savings to issuers, and thus taxpayers, we think it is a perfect fit for the messaging of HR 1, namely tax cuts for the middle class. Allowing public issuers to take advantage of beneficial fluctuations in interest rates to gain savings on debt service ultimately benefits taxpayers, so we see advance refundings as a win-win for this bill."
All of the groups, however, expressed their gratefulness that the Senate did not follow the House Ways and Means Committee in proposing to terminate private activity bonds.
The Education Finance Council, which represents nonprofit student loan lenders in 19 states, commended the Senate for preserving student loan bonds. “The preservation of Qualified Student Loan Bonds within PABs ensures that families will continue to have access to the low-cost education loans funded by the proceeds of these bonds,” Debra Chromy, president of EFC said.
Also on the plus side, the Senate’s top income tax rate of 38.5% for single tax files with taxable income over $500,000 and for married couples filing jointly with incomes over $1 million would be close to the current top rate. And PABs and muni investments would become more attractive with the proposed repeal of the alternative minimum tax.