Recent headlines on Congress’s ambitious plans for tax reform focus on those most prominent objectives laid out by Republicans in the House and Senate, such as improving our global competitiveness through reduction of the corporate income tax rate, simplifying the tax filing process for individuals and delivering tax cuts to middle class families.
H.R.1, the “Tax Cuts and Jobs Act” (the House plan) is 429 pages long, and the Senate version runs 515 pages. So, of course, there’s much more to these plans than what you’ve seen thusfar in those headlines.
As state treasurer, I work to minimize burdens placed on Utah taxpayers in every aspect of the state’s fiscal operations. This includes carefully controlling costs associated with banking, investments and the issuance of legislatively authorized debt. I am focused on provisions of these plans that can affect Utahns, even if only indirectly, through my work and that of treasurers and other finance officials throughout the state. So in the interest of keeping you informed, I’d like to discuss with you some issues in the plans that lie a little off the beaten path and in the weeds.
I commend Utah Sen. Orrin Hatch and the Senate Finance Committee for putting forth a plan that preserves the use of Private Activity Bonds (PABs), an essential tool used by state and local governments to facilitate low-cost financing of hospitals, educational facilities and affordable housing infrastructure.
The Senate plan also appropriately upholds an exemption from Unrelated Business Income Tax (UBIT) currently applied to public pension plans. Repeal of the exemption (as was proposed in the House plan) would significantly reduce investment earnings generated by Utah Retirement Systems. Such reductions would have to be replaced by additional contributions from state and local government employers that participate in URS, ultimately burdening Utah taxpayers with added costs.
At least 75 percent of all public infrastructure is financed by state and local government, so any federal legislation that diminishes the value or impairs the use of tax-exempt bonds should be carefully considered. Unfortunately, both the House and Senate plans eliminate federal tax-exemption of “advance refundings,” a form of money-saving bond re-financing that saves U.S. taxpayers billions of dollars in interest expense. Estimates indicate that in Utah alone, advance refundings saved in excess of $105 million over just the past five years. To me and Utah taxpayers, this is real money. I’m hopeful that Congress will re-consider the elimination of this essential money-saving tool.
Further, these provisions prospectively take effect on Jan. 1. In reaction, municipal bond issuers across the country are now scrambling in disorderly fashion to complete advance refundings before year-end. Rushed implementation of significant changes to the public municipal debt market could lead to unintended consequences that are costly to taxpayers.
I’m hopeful that as negotiations between the House and Senate proceed, some consideration will be given to delayed implementation, should the tax exemption of advance refundings ultimately be eliminated in the final bill.
Lastly, I am concerned about the potential effect these plans might have on federal deficits and debt. The non-partisan Joint Committee on Taxation estimates that the House plan will increase federal budget deficits by more than $1.5 trillion, possibly adding to federal debt that already stands at a whopping $20 trillion. The potential offset is dependent upon economic forecasts for GDP growth which, while not unreasonable, must provide economic growth sufficient to generate future increases in tax revenue that can exceed the costs of reform.
When considering high-stakes policy proposals which rely on economic forecasts, we should remember the words of the “Oracle of Omaha,” Warren Buffett: “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
The Senate plan seems to best strike an appropriate balance between federal, state and local fiscal policies. I applaud the Senate Finance Committee for the treatment of PABs and UBIT within their plan, and I’m encouraging congressional leadership to reconsider the provisions related to advance refundings when the House and Senate bills are reconciled.
David Damschen is Utah’s state treasurer. He also serves on 18 boards and commissions, including Utah Retirement Systems and Utah Housing Corporation.