WASHINGTON – Some local governments won't be able to participate in the Trump administration’s proposed competitive matching grants for infrastructure projects because they simply don't have the money needed for their share of the funding, their officials said on Tuesday.

They talked about the president's plan at the National League of Cities conference here during a panel discussion about the new limitations placed on local governments by the tax law changes enacted in December.

The Trump plan proposes only a 20% federal share, leaving local governments to come up with 80% of their own money or in partnership with the state and private investors.

That’s a problem in Texas, according to Waco City Council Member John Kinnaird, because Gov. Greg Abbott is proposing a 2.5% annual cap on local property tax increases.

National League of Cities congressional conference discussion on tax reform
National League of Cities congressional conference discussion on tax reform Brian Tumulty, The Bond Buyer

“If anything was preserved for us at the federal level, our governor wants to take it away,” Kinnard said, noting that Texas is one of the states without a state or local income tax.

One of the new tax law's provisions – a $10,000 cap on the federal deduction of state and local taxes – helped drive a surge in tax revenue during the fourth quarter of 2017 when some taxpayers tried to pay those taxes before the end of the year to avoid the cap.

The District of Columbia received about $90 million in prepaid property taxes at the end of 2017, said Jeffrey DeWitt, the district’s chief finance officer.

That’s in line with a report issued Monday by the Rockefeller Institute of Government that found early fourth quarter data indicates the strongest growth in state tax revenues in the post-Great Recession period.

Overall state tax revenues grew 12.2% in the fourth quarter compared to a year earlier, the Rockefeller report concluded, based on preliminary state data.

DeWitt cautioned local officials at the NLC conference to treat that increase as a one-time windfall attributable to tax reform.

The new tax law, however, may generate increased tax revenue in states with income taxes that don’t base their deductions on the federal code. In states that conform to the federal tax code, on the other hand, tax reform may reduce tax revenue.

Local governments already are facing higher costs because the new tax law terminated advance refundings after the end of the year.

Waco recently issued bonds with an eight-year call at a slightly higher interest rate instead of more traditional 10-year call bonds because of the absence of advance refundings, Kinnaird said.

Although advance refundings were terminated, legislation that would restore them has been proposed by Reps. Randy Hultgren, R-Ill., and Dutch Ruppersberger, D-Md., co-chairs of the House Municipal Finance Caucus.

“This simple tweak will ensure that municipal governments can refinance their debt at the lowest possible cost,” Ruppersberger said Tuesday, speaking at the conference with Hultgren.

Many local officials also were disappointed tax reform didn’t provide a dedicated revenue source for financing infrastructure investment.

That revenue was expected to come from the repatriation of overseas profits from U.S. corporations for that purpose, said Natalie Cohen, managing director and head of municipal research for Wells Fargo.

Instead, it was used to help pay for the new tax law.

“The repatriation has been spent 500 times over,” Cohen said.

DeWitt said the district’s five-year capital improvement plan of $6.2 billion over five years only partially covers the $11 billion in immediate needs.

“We don’t need ideas; we don’t need rhetoric,” DeWitt said, adding that what’s really needed is additional federal money.

DeWitt said the federal government is proposing to cut its funding for the Washington Metropolitan Area Transit Authority at a time when the District, Virginia and Maryland are working on coming up with the additional funds needed to meet the transit agency’s capital needs.

Cohen said the early expectation for a tax credit to be part of the infrastructure plan looks like the Opportunity Zone provision in the tax law.

States and the District of Columbia have been asked by Treasury to propose 25% of their low income census tracts for opportunity zone designation by March 21. But they can ask for a 30-day extension.

Puerto Rico is a special case with virtually the entire island qualifying, according to Kenan Fikri, manager for research and policy development at the Economic Innovation Group.

Investments in opportunity zones will be exempt from capital gains taxes for 10 years, Fikri said.

Sen. Tim Scott, R-S.C., also a Tuesday speaker, some of the opportunity zone developments will involve public-private partnerships.

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