On November 2, 2017, House Ways and Means Committee Chairman Kevin Brady (R-Texas) released the much-anticipated tax reform bill H.R. 1, the Tax Cuts and Jobs Act. The comprehensive draft proposes substantial changes to the federal tax code governing individuals and corporations. As expected, the committee began the process of marking up the bill (i.e., considering potential changes) on November 6. When the process is completed, the bill is expected to go to the floor for a vote before the full House of Representatives. Although the process appears to be developing fairly quickly, it remains uncertain whether the bill will pass the House, as Democrats will likely be unified in voting against it, and a number of Republicans have already expressed either concern about or opposition to the bill as drafted. This early uncertainty could be further compounded in the Senate when the chamber begins considering its own version of a tax reform bill in the coming weeks.
One of the primary issues with the bill is the repeal of the state and local tax (SALT) deduction, which GFOA has been actively engaged with in recent months. On the individual side, the bill proposes to eliminate the deduction for state and local income and sales taxes paid, and it would cap the deduction for local property taxes at $10,000 per itemizing taxpayer. Corporations would retain the ability to deduct those taxes. GFOA will continue opposing this change, especially given the significant impact it would have on the ability of state and local governments to set tax policy. Click here for GFOA resources on the impact of eliminating the SALT deduction.
As expected, the House bill proposes collapsing the current seven tax brackets into four – 12%, 25%, 35%, and 39.5%. It also doubles the standard deduction to $12,000 for individuals and $24,000 for married taxpayers who file jointly. But the bill repeals the personal exemption and creates a new, temporary $300 per-person family credit for each person in a taxpayer’s family, including the primary taxpayer and non-dependent children. In a somewhat unexpected twist, the bill also proposes to cap the mortgage interest deduction on new or refinanced loans up to $500,000. Further, the bill repeals the deductions for medical expenses, moving expenses, contributions to medical savings accounts, and student loan interest, as well as the alternative minimum tax.
With respect to public finance, the bill does not repeal the current exclusion for interest earned on municipal bonds; however, it does make some changes that are of concern to GFOA. The most notable of these are a repeal of the ability to advance refund municipal bonds and the termination of the ability to use private activity bonds (PABs). Advance refunding allows public issuers to take advantage of fluctuations in interest rates to realize considerable savings on debt service, which ultimately benefits taxpayers. PABs are used for a wide variety of projects like airports, seaports, affordable housing, and non-profit health and education facilities, all of which provide essential public services. Some of the other changes related to finance are the repeal of tax credit bonds and a prohibition on the use of tax-exempt bonds to finance and build professional sports stadiums. GFOA and other public issuers are weighing in with Ways and Means Committee members on these proposed changes.
One change that may be of concern among public pension plans is a provision on the unrelated business income tax (UBIT) treatment of entities treated as exempt from taxation under section 501(a). The change seeks to clarify that all entities exempt from tax under section 501(a), notwithstanding the entity’s exemption under any other provision of the code, would be subject to UBIT rules.
On the corporate and international side, there are a number of changes to note. For one, the current corporate maximum rate of 35% would be dropped to a flat 20%. Pass-through businesses, where earnings flow through to owners as income, would face new rules, and the owners of such businesses would pay a 25% rate on earnings. And finally, the bill proposes a territorial tax system under which U.S. companies would pay tax only on active domestic income (but not foreign-derived income).
GFOA will continue to monitor the process and report developments as they occur.