The U.S. House on Nov. 16 passed a controversial 440-page bill to rewrite the federal tax code.

The House bill would lower the corporate tax rate from 35 percent to 20 percent, change income tax brackets, nearly double the standard deduction, and limit or eliminate numerous deductions, including the one for state and local income and sales taxes, known as SALT.

The bill would strike the historic tax credit and end tax-exempt status for private activity bonds, both of which are used for local economic development and affordable housing initiatives.

The House bill would also eliminate deductions for student loan interest and moving and medical expenses. Students in graduate or doctoral programs who receive a tuition waiver because they teach or do research would be subject to income tax on the waiver, a major policy change that would have an outsize impact on Massachusetts with its high percentage of students.

Attention now turns to the Senate, where its proposal would eliminate the SALT deduction and repeal the individual mandate provision of the Affordable Care Act. The Senate bill would also end the tax cuts for individuals in 2026, while making corporate tax cuts permanent.

The federal tax overhaul is now on a fast track, having been identified as a top priority by the president and Republican congressional leaders.

On Nov. 8, the MMA joined 21 other state municipal leagues and the National League of Cities in urging members of Congress to preserve the SALT deduction in any federal income tax overhaul and to reject the current version of the legislation.

The NLC and the state municipal leagues are calling on local officials across the country to contact their members of Congress and urge them to protect taxpayers by preserving the SALT deductions as well as the historic tax credit and all tax-exempt bonds.

In a letter to members of Congress, the municipal leagues state: “Unfortunately, this Act asks cities and towns to do far more with far less. We recognize that our federal tax code is in need of simplification, but offsetting a tax plan on the back of municipal governments should be rejected.”

Read the letter to Congress on this issue from the NLC, MMA and 21 other state municipal associations (336K PDF)

MMA Executive Director Geoff Beckwith said the tax reform debate on Capitol Hill “will have real implications for local taxpayers and municipal finance in Massachusetts.” The House bill, he said, “contains provisions that would increase the tax burden on middle-class taxpayers in our state and remove important municipal finance tools to build local economies.”

Ending SALT deductions would end a 104-year practice by the federal government of precluding double taxation. More than half of Massachusetts taxpayers deduct state and local taxes, Beckwith said, and these taxpayers would see a significant increase in their tax burden.

Eliminating the historic tax credit would harm investments in communities, according to municipal groups, particularly in states such as Massachusetts with many older buildings and factories in need of preservation and redevelopment.

A proposed $10,000 cap on the property tax deduction would be especially painful in states like Massachusetts, Beckwith said, where more than two dozen communities already have average property tax bills that are higher than the cap.

Revoking the tax-exempt status of private activity bonds and eliminating advanced bond refunding would damage local finances and economic development, the municipal leagues argue. Private activity bonds are a tool used to leverage private investment in local housing and economic development projects. Advanced bond refunding allows taxpayers to refinance and save money on municipal bonds during economic downturns.

After Congressional leaders released their plan, the MMA opposed the tax proposals in a press conference on Nov. 3 with U.S. Sen. Edward Markey.

“Changes to tax policy should be balanced and well thought out,” Beckwith said, “which is why the MMA has joined with a wide range of nonpartisan groups to protect cities and towns, including the National League of Cities, the National Governors Association, the National Conference of State Legislatures, the International City/County Management Association, the U.S. Conference of Mayors, and the Government Finance Officers Association.”

Gov. Charlie Baker has also voiced significant concerns about the congressional tax proposals. At a meeting of the Massachusetts Association of Community Development Corporations on Nov. 17, he said the bills “would make life dramatically more difficult for families, and for those who work with families, who are trying to find affordable housing options.” In a Nov. 20 interview on WGBH’s “Boston Public Radio,” he said, “If you really want to do something for the middle-class, this is not it, because the middle class – in Massachusetts anyway – will probably take the biggest hit.”

The Senate bill was reported out by the Senate Finance Committee on Nov. 16 and was expected to move quickly to the full Senate for deliberation.

If the Senate passes its tax overhaul, the House and Senate bills would be sent to a conference committee to iron out differences before final votes in each chamber on a compromise bill that would be sent to the president.

Link to the National League of Cities website for its statement opposing the elimination of SALT deductions

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