What Trump's Tax Plan Means for State and Local Governments
President Trump unveiled his tax reform plan on Wednesday and it's a mixed bag for states and localities.
The good news is that the plan keeps the tax-exempt status of municipal bonds, which are the main way governments finance roads and schools, among other infrastructure projects. Removing this tax perk for bond investors would lead to higher interest rates on the debt, thus increasing governments' cost of paying off that debt. One estimate pegs the value of the current tax perk at about $714 billion for state and local governments between 2000 and 2014.
The bad news is that the plan eliminates the itemized deduction that lets taxpayers deduct their state and local taxes from their declared federal income. Critics of the deduction argue it subsidizes high-tax states. Advocates of the tax counter that it helps incentivize homeownership because homeowners can deduct their local property tax from the income they declare to the federal government.
Trump’s plan also calls for a much lower corporate tax rate, the elimination of the U.S. tax on foreign profits, a reduction in the number of individual income tax brackets from seven to three and a lower overall income tax rate.
The Takeaway: Government organizations are already sounding alarms about the state and local tax deduction. It is highly valued because it's a perk that, if lost, would make it harder for states and localities to raise their tax rates going forward. This is particularly true for higher-tax states where citizens would no longer get a substantial tax break at the federal level.
The National Conference of State Legislatures called the deduction "vital" to middle-class taxpayers while the National Association of Counties said eliminating it was a “$1.3 trillion federal money grab." California Controller Betty Yee warned nixing the deduction “could lead to an economic downward spiral in California, including the loss of good-paying jobs and cuts to critical public safety and social services programs.”
Still, the plan does aim to simplify and cut taxes for the middle class by doubling the standard deduction to $12,000 for individuals and to $24,000 for married couples. That would theoretically soften the blow because it would allow many people -- including homeowners -- to avoid the complicated process of itemizing their taxes to claim various credits and deductions.
Foxconn's Big Play
Cities and states continue to dole out big tax incentives to lure jobs even though the benefits of doing so remain unclear.
In exchange for $3 billion in tax credits, the Foxconn Technology Group has pledged to create an initial 3,000 jobs in the state of Wisconsin. That number is expected to increase to 13,000 once the site is fully operational. Foxconn has also said it would ultimately invest $10 billion in the plant.
The deal, which would be the largest incentive package for a foreign company in U.S. history if Foxconn follows through with its commitments, started as a bidding war. Wisconsin’s winning offer was five times larger than North Carolina’s, the only other publicly known offer. Michigan, Ohio and Pennsylvania were also in the running for the Taiwan-based manufacturer’s proposed flat-screen plant.
The Foxconn deal comes as Amazon has announced it is searching for a city to host its second headquarters. The company expects to create 50,000 new jobs, and observers expect a similarly sized bidding war.
The Takeaway: From a credit ratings perspective, the deal is risky. Fitch Ratings notes that property tax base growth will likely be limited by incentive agreements. But it adds, “Local governments may stand to gain from the development deal through the significant influx of high paying jobs.” If such economic growth is significant, Fitch says that “may” lead to a ratings boost down the road.
However, says the Court Street Group’s George Friedlander, any notable amount of increased economic growth is not guaranteed. He cites the state’s Department of Administration analysis that concludes Wisconsin’s break-even point on the deal would come a full decade after the state stops giving Foxconn its tax breaks. In other words, the financial benefits to the state will hit a generation from now.
“While jobs are arguably better than no jobs, it is not clear that the project will generate incremental wealth for the state or its employees, relative to the tax breaks conferred,” writes Friedlander. “The transaction as a whole does not do a lot to bolster the case made by proponents of such incentives nationwide that they are the best use of taxpayer funds or good policy.”
St. Louis Blues Standoff
Over the past two months, St. Louis officials and the city's hockey team have faced off over whether the public should finance an upgrade to the team’s arena. Earlier this year, the city council approved a $105 million financing package to retrofit the city-owned, 23-year-old Scottrade Center. But now, they could take that back.
On Friday, Alderwoman Cara Spencer introduced alternative financing legislation that would pay for the upgrades using the existing facility fee that is charged on each ticket sold. The Blues ownership, which currently pockets that fee, isn't a fan of the idea and is challenging it.
St. Louis Treasurer Comptroller Darlene Green, who’s being sued by the Blues for blocking the original financing deal, has called the idea a model for future sports and entertainment projects in the city. “By levying a small fee on ticket sales that are then set aside in a fund for facility construction and improvements," she said, "the plan does not draw upon the city’s general fund or risk harming the city’s credit.”
The Takeaway: Spencer believes the council has a legal case in reconsidering the initial $105 million financing package approved earlier this year. She says the full council didn’t have all the facts. “The [Blues] lawyers told us that the lease was silent on who is responsible for upgrading the facility,” says Spencer. “[The lease] clearly states opposite.”
The take-back legislation isn’t the end of it, either. 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. She also plans on introducing legislation in the near future that requires the council to have all relevant legal documents available before casting a vote.
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