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Tax reform’s harmful impact on city finances

Experts see revenue shortfalls hitting local government

Tax reform may cut important tools cities and local government use to fund infrastructure projects.

The Republican party’s big push for tax reform is almost at the finish line after Senate passage of a bill late Friday night. It’s far from over, since the House and Senate need to reconcile differences in their bills via the conference process. But many experts Curbed spoke with agree that the final result will likely throw a wrench in local and municipal budgets, which are already showing signs of slowing.

“There are storm clouds on the horizon when it comes to city finances,” says Elizabeth Kellar, director of public policy at the International City/County Management Association.

Now is not the time to hit cities with more budget challenges. According to a recent National League of Cities survey, city leader forecast a decline in sales and income tax revenue this year, declining confidence, and lower property tax revenue.

“Cities were just able to hire again and offer moderate salary increases after the recession, and now, at a minimum, with the uncertainties about how tax reform is going to affect local finances, you’re going to see further tightening,” says Kellar. “It’s definitely not a good thing for state and local governments.”


Infrastructure investment will become more expensive

While it was a big focus on the campaign trail, infrastructure funding has become less of a political priority this year, at least compared the health care and tax reform. According to Kellar, that’s a disappointment to state and local officials, who are anxious to begin overdue upgrades.

Not only has tax reform crowded out efforts for a federal infrastructure plan, but two parts of the reform, which appear in both the House and Senate versions, will make local infrastructure investment more expensive.

First, the elimination of Private Activity Bonds (PABs) will hinder local construction projects. According to Tracy Gordon of the Tax Policy Center, PABs, thought of as public debt used for private purposes, underlie something like three-quarters of all public-private partnerships, which go towards building hospitals, airports, and many housing development. The cut also has the added impact of eliminating the applicability of the Low-Income Tax Credit as well, cutting into affordable housing creation.

Second, both bills eliminate what’s called Advanced Refunding Bonds. These are a tax-exempt type of municipal bond that allows counties to refinance their bonds. Between 2012 and 2016, the practice saved cities and counties $12 billion on infrastructure projects.

Sadly, this comes at the same time the deficits created by the bill would trigger automatic cuts in transportations spending, creating even more need for local road-building and infrastructure repairs.

By altering or removing state and local tax deductions, many cities will be under pressure to cut taxes

Proposed cuts to the state and local tax deduction, or SALT, will significantly raise local taxes for homeowners in wealthy urban areas, many of whom live in progressive cities which may fund more generous social welfare programs. Without the SALT deductions, localities will be pressured to cut taxes.

“Counties are often the government closest to the people,” says Jack Peterson of the National Association of Counties. “As people see double taxation on an individual level, local governments are the ones they seek out to lower tax bills. It’ll constrain revenues and services.”

Realtors have suggested the loss of SALT and the mortgage-interest tax deduction could create a 10 percent decline in property values in high-value areas and de-incentivize homeownership, according to Brian Namey, director of public affairs at the National Association of Counties, cutting into city tax revenues.

Cutting the Historic Tax Credit will remove a key tool for resurrecting and redeveloping old buildings and historic downtowns

The program, eliminated in the House bill and scaled back in the Senate version, encourages the redevelopment of historic and abandoned buildings. According to analysis from the National Trust for Historic Preservation, the program has been used to renovate more than 40,000 structures and channel $117 billion in private investment since being enacted by the Reagan administration in 1981.

“Absent the historic tax credit, developers would move towards tearing some of these old buildings down,” says Darryl Jacobs of law firm Ginsberg Jacobs, a tax credit expert. “It’s extremely important. Adaptive reuse costs less than new construction, so in a soft economy, it gets things done. During and after the crash, a lot of deals were done with this credit. And overall, it saves buildings that otherwise wouldn’t be saved. If we lose this tool, it’s going to be devastating”

Remember, the program has actually been a net benefit from a revenue perspective. A National Park Service/Rutgers University Economic Impact reports that found for every dollar in tax credits, the program created $1.20 in construction activity, business taxes, income taxes, and property taxes.

It will likely strain social services

The proposed budget will add to the national debt, and likely set up automatic cuts to social services, which will strain the finances of cities and counties, according to Kellar, who are often on the front lines of social service. If the individual mandate is eliminated, that means 13 million people will lose health insurance, which will put more strain on public hospitals as a last resource for medical care.

Eliminating SALT also would mean less itemizing, as would the new cap on mortgage-interest deductions (MID) proposed in the House bill, which would lead to less charitable giving. Lower budgets for charities would add to the strain on city and county-provided social service.

“I can see why city leaders are concerned about tax reform,” says Gordon. “It’s more difficult to make ends meet.”