The Week in Public Finance: The Senate’s Tax Reform Plan, Election 2017’s Impact on Spending and More

Nov. 10--The Senate Vs. the House on Tax Reform

Senate Republicans unveiled a draft of their tax plan on Thursday, and it contains both pluses and minuses for state and local governments.

The good news: The Senate's plan likely won't eliminate private activity bonds, as has been proposed by House Republicans. The bonds are often used by development agencies, are tax-exempt, and are issued on behalf of a government for a project built and paid for by a private developer. Low-income housing advocates, development finance agencies and infrastructure associations have come out in defense of the financing mechanism, arguing that its elimination would significantly stymie development projects.

The bad news: The legislation totally eliminates the ability of people to deduct state and local taxes from their declared federal income. The House version, however, allows homeowners to still deduct up to $10,000 in property taxes.

The Senate's version of tax reform contains a few other key differences from the House, such as delaying implementation of the corporate tax rate cut by one year. The Senate finance committee is constrained by a rule that bans lawmakers from increasing the deficit by any more than $1.5 trillion over the next decade.

The Takeaway: Assuming both bills pass their respective chambers, Republican leaders from the House and Senate will hammer out a compromise bill with input from the White House. If the state and local deduction is indeed eliminated, it will almost certainly be a sticking point for Democrats and some moderate Republicans. After striking out on health-care legislation earlier this year, Republicans badly need a win.

But as we've seen with the Affordable Care Act, when one party rams through major legislation, it creates uncertainty -- and that's not great for the economy. "With bipartisanship you get the certainty and predictability you need for long-term innovation and growth," said Democratic Sen. Ron Wyden of Oregon this week at a Tax Policy Center event in Washington, D.C. "Without that, as soon as other side takes over, they're going to set out and make some changes."

Election 2017 Brings New Government Spending Debates

Tuesday's election saw a wave of victories for progressive causes and candidates, signaling a shift in several states' upcoming government spending debates next year.

One of those shifts will center around Medicaid expansion. In Maine, voters approved a ballot measure to expand it under the Affordable Care Act. Calling it "ruinous" for the state's budget, though, Gov. Paul LePage has already said he won't carry out an expansion unless it's fully funded by the legislature.

In Virginia, Democrats made huge gains in the state House. Long dominated by Republicans, the state legislature blocked outgoing Democratic Gov. Terry McAuliffe's repeated attempts to expand Medicaid. With the pickups and a new incoming Democratic governor, many are hopeful it'll happen in 2018.

Another shift is in New Jersey, where the Democratic legislature repeatedly battled with outgoing Republican Gov. Chris Christie over budget issues such as pension funding and taxes. With Democratic Gov.-elect Phil Murphy, the state is returning to one-party rule that, many hope, will lead to fixes for the state's ailing pension system.

And in big cities across the country, progressive candidates claimed victories. Notably, the incoming mayor of Charlotte, N.C., campaigned on progressive issues that include a $15 minimum wage.

The Takeaway: Unfortunately, agreement on what to spend the money on is only half the battle. Politicians still have to figure out where that money will come from. And in today's constrained revenue climate, even one-party ruling rule doesn't keep long fights on such issues from happening.

In New Jersey, Murphy faces a particularly tough road. During his campaign he called for increasing funding for the state's pension plans. While that would certainly be good, the state hasn't paid as much as 60 percent of what it was supposed to over the past 20 years. In fact, Christie's budgeted pension payment this year -- half of what's required -- is the highest since 2008.

The state's pension plans are collectively 31 percent funded. Every year the state skipped on part or all of its payment, the worse things got. "Getting New Jersey out of this situation," according to an S&P Global Ratings report this week, "could take years and multiple gubernatorial administrations."

Oklahoma's Budget Battle Continues

Oklahoma's protracted budget battle slogged along this week with little progress.

Gov. Mary Fallin signed a bill pushed by the House and passed by the Senate that withdraws $23 million from the state's already dwindling rainy day fund to help fund the state's Department of Mental Health and Substance Abuse Services. But that still leaves a nearly $200 million deficit that lawmakers can't agree on how to plug.

The state Senate overwhelmingly supports raising revenue, but the House doesn't. This week, it once again failed to pass a Senate bill that would hike taxes on tobacco, alcohol, fuel and energy production.

The state's shortfall was caused when lawmakers earlier this year attempted to get around the state's tax-raising restrictions by approving a $1.50-a-pack "smoking cessation fee" in the waning days of the regular session in May. Just three months later, the state Supreme Court struck down that fee as an illegally passed tax.

The Takeaway: In many ways, this fight isn't just about this year's budget deficit, which represents just 4 percent of spending. As Moody's Investors Service points out, "the nearly six week-long impasse underscores the economic and institutional weaknesses that have led to a persistent structural budget imbalance since 2015."

In that time, the state has cut spending by 5.3 percent. Lawmakers, however, have been unable to agree on any major revenue-raising measure to plug the rest of the annual deficits. So they have repeatedly resorted to one-time fixes. Even if they sort it out this year, they face an estimated $500 million budget gap next year. "The legislature's inability to pass a comprehensive and permanent solution," warns Moody's, "weighs on Oklahoma's credit quality."

The situation resembles that of Kansas' repeated budget deficits after the legislature passed tax cuts in 2012 without cutting other spending. Lawmakers overrode Gov. Sam Brownback's veto and reinstated some of the tax cuts earlier this year.

To read this regularly, subscribe to "The Week in Public Finance" newsletter for free.

Liz Farmer -- [email protected] -- @LizFarmerTweets

___

(c)2017 Governing

Visit Governing at www.governing.com

Distributed by Tribune Content Agency, LLC.