Eliminating SALT May Not Be Such a Good Idea
The U.S. House and Senate tax overhaul bills, which are now in the hands of a reconciliation committee, differ in several key areas. Both, however, totally eliminate the deductibility of state and local sales and income taxes, and cap the property tax deducation at $10,000. This, two new analyses say, could really hurt state and local governments.
The Center on Budget and Policy Priorities (CBPP) found in a new report this week that even taxpayers in states without an income tax take advantage of the state and local tax (SALT) deduction. Taxpayers in high-income-tax states such as California, Connecticut and New York have been singled out as the biggest beneficiaries of this perk. But the analysis shows that most of the country’s taxpayers who itemize their deductions benefit from it. In Nevada, which doesn't have an income tax, half of Las Vegas-area taxpayers deduct their sales taxes.
Meanwhile, Fitch Ratings has said that a cap on the deductibility of property taxes could reduce the incentive to buy homes, particularly in areas where prices are high. “This could result in lower revenue growth prospects for affected local governments absent tax rate increases,” the agency warned.
The Takeaway: These analyses indicate that retaining a limited deduction for property taxes does little to protect state budgets from the strain that fully repealing SALT would produce. “Eliminating the income or sales tax deduction," according to the CBPP, "would likely lead over time to cuts in state funding for schools, health care, and other services on which middle- and lower-income families rely.”
The findings aren't likely to have much impact on Capitol Hill discussions. Credit ratings agencies have been warning for months that the framework for tax reform could harm state and local government budgets. What's more, polls show that more voters are opposed to the plan than support it. GOP leaders have nevertheless are committing to forging ahead, with Senate Majority Leader Mitch McConnell saying it was “almost certain” a bill would pass in the coming weeks.
St. Louis Blues Emerge Victorious
The St. Louis Blues have scored in the team’s latest face-off with city Comptroller Darlene Green. This week, she finally signed off on a $64 million bond issuance for hockey arena upgrades after the Blues filed a contempt of court motion against her for not doing so.
The bonds are part of a $105 million public financing package to upgrade the city-owned, 23-year-old Scottrade Center, where the Blues play. The package was narrowly approved by city aldermen earlier this year. For months, Green had refused to approve the financing, saying it was not in the best interest of city taxpayers and that putting the city’s general fund on the hook for the bond payments could harm St. Louis’ credit rating.
In a statement this week, Green’s office said she did not comply with the finance agreement voluntarily and reserves right to appeal the court’s Nov. 27 decision.
The Takeaway: This story is far from over. Alderwoman Cara Spencer has sued the Blues on the grounds that it’s illegal for the city to spend public funds that will solely benefit a for-profit entity. That case is expected to start trial this month.
The very public dispute between city leaders and a sports team is indicative of a wider skepticism toward stadium financing. In August, for example, a deal to build a new ballpark for a minor league baseball team in Prince William County, Va., fell through after concerns were raised by board members about taking on debt for the project. Stadium bonds are also expected to lose their tax benefits under federal tax reform.
Skirting the Downside of Junk Status
Moody’s Investors Service rates Chicago as a junk bond. S&P Global Ratings and Fitch only score it slightly better. So just how is the city selling up to $3 billion in bonds with a AAA rating?
It turns out Chicago is copying tactics used previously by New York City during its financial crisis in the 1970s and more recently by Puerto Rico. Chicago has essentially created a company that will sell the bonds. The bonds, in turn, will then be paid back directly from Chicago’s sales tax revenue.
This approach effectively shields the bonds from the city’s general fund revenue woes because the bondholders will have first claim on the sales tax revenue before it’s deposited into city coffers. City officials have said the new mechanism would allow Chicago to refinance some of its more than $9 billion in debt with lower interest costs.
The Takeaway: The idea is becoming more en vogue for troubled governments that are having a hard time getting affordable interest rates on their general obligation bonds. In 2015, a year after Detroit emerged from bankruptcy, the city was still rated at junk status. But it sold bonds with an investment grade rating by promising investors they would have first claim on income-tax revenues. Earlier this year, Connecticut’s treasurer floated a similar idea in an effort to get better interest rates on its debt.
In short, these so-called secured bonds are a way for governments to game the credit ratings system and snag lower interest rates. Although some analysts look upon these deals with a lot of skepticism, others believe it helps protect investors from a government's fiscal pressures.
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