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Towns and cities fear trickle-down tax effects

The Washington Post

November 18. 2017 11:28PM

It took the city of Pataskala, Ohio, nine ballot measures before its 15,000 residents agreed to a new 1 percent tax to pay for repairs to its crumbling roads and to buy new police cruisers. The mostly rural community was finally won over by a century-old hallmark of the tax code: The $5 million local levy could be deducted from their federal taxes.

"There is a severe sensitivity to more taxes here," said James Nicholson, the city's finance director. "At the end of the day, you get a tax break was the thing that convinced people."

Now, in small towns and thriving cities, in Republican- and Democratic-leaning states, local leaders are warning that the $1.5 trillion tax legislation moving through Congress threatens to undermine their ability to raise money for government services, including police and schools. The Republican measures would eliminate or severely curtail taxpayers' ability to lower their federal tax bill by deducting the cost of their state and local taxes. Without that offset, local leaders say, taxpayers will begin to seek relief closer to home, potentially making it more difficult to provide basic services.

The House passed a bill Thursday that would severely curtail the tax deduction, allowing people to deduct only up to $10,000 in property taxes from their federal returns, while the Senate is moving a bill forward that would eliminate it.

"I am hearing from our members across the country," said Irma Esparza Diggs, director of federal advocacy for the National League of Cities. "It's not just an inside-the-Beltway conversation."

In Pataskala, Nicholson worries that weary residents might balk at future tax increases to pay for a backlog of infrastructure projects. Worse, exasperated residents might even call for a repeal of the 1 percent tax that local officials spent years putting in place.

"Hopefully, they will see the parks that are being maintained, we're fully staffed in our police department," Nicholson said. But eliminating the deduction "could open a can of worms" that could even make it difficult for the city to keep up with financial obligations, he added.

In San Diego, officials drawing up plans for a local tax increase to provide long-term housing to the homeless are also worried. In San Diego County, the elimination of what is commonly called the "SALT" deduction could affect about a third of households, said Greg Cox, a member of the board of supervisors. The average middle-income resident would lose a $16,000 deduction.

"It's a big hit," he said. The Republican tax plan is "going to make it very hard to pass any tax increases in the future."

The fate of the tax deduction is among the thorniest issues facing Republican lawmakers who are rushing to vote on the $1.5 trillion tax bill this year. About 44 million Americans a year take advantage of the tax break to collectively save an estimated $60 billion.

But conservatives have long complained that the deduction is a windfall for high-tax, liberal-leaning states at the expense of low-tax, conservative-leaning states. According to the conservative Tax Foundation, taxpayers in six states - California, Illinois, New Jersey, New York, Pennsylvania and Texas - claim more than half of the dollar value of the deduction.

All of them except Texas are overwhelmingly represented by Democrats.

Republicans have repeatedly attempted to eliminate the provision, most recently in an effort led by President Ronald Reagan in 1986.

"We can't have the federal government continue to subsidize the states," Treasury Secretary Steven Mnuchin said in a CNBC interview last month. "That's a major loophole that we're trying to close in simplifying taxes."

Some lawmakers even in high-tax states echo that view.

"The question is: Should taxpayers in low-tax states be subsidizing the taxpayers in high-tax states?" Sen. Patrick Toomey, R-Pa., a member of the tax-writing Senate Finance Committee, said this year. "It's not clear to me why that's good policy."

Nearly 30 percent of taxpayers in Pennsylvania use SALT, according to data from the Government Finance Officers Association. On average, those taxpayers claim an average deduction of $11,000.

Supporters of the deduction argue that its elimination will hurt middle-class families. Among taxpayers making more than $100,000, 81 percent claimed the SALT deduction. Without it, supporters say, taxpayers face double taxation - paying federal taxes on income already claimed by state and local taxes.

City leaders speaking out against eliminating the deduction are sometimes putting themselves at odds with their representatives in Congress.

Louisville Mayor Greg Fischer, D, visited Capitol Hill this week, including a stop by the offices of Senate Majority Leader Mitch McConnell, R-Ky., a major proponent of the Senate bill.

"It's a $1.3 billion problem for my city," Fischer said of the potential elimination of SALT. "That is less than Los Angeles or New York, but that is going to hit a lot of folks."

"I totally believe we need tax reform. I am a business person, entrepreneur. I am not a career politician," he said, adding that he wants to make sure his local representatives understand what the city is facing.

Local governments' fears aren't confined to the effects of removing the state and local tax deduction. Officials in the District and other cities also worry about the House plan to repeal a form of tax-exempt financing for development called private activity bonds.

Those bonds, which help lure private investors to low-income housing projects and other civic endeavors by effectively allowing them to borrow at municipalities' low interest rates, have resulted in about 9,000 units of affordable housing in Washington since 2010, city officials say. (The Senate bill would retain private activity bonds.)

"If it wasn't for these private activity bonds," Esparza Diggs said, "many [cities] wouldn't be able to expand their airports, or meet their affordable housing needs."


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