More Tax Rewrites Lie Ahead

The Bond Buyer - - Front Page - By Brian tu­multy

WASHINGTON – Repub­li­cans in Congress ex­pect the wide-rang­ing tax over­haul law just en­acted will be fol­lowed by more tax leg­is­la­tion in 2018 that in­cludes ex­ten­sions for ex­pired tax pro­vi­sions such as one that would ex­tend qual­i­fied zone acad­emy bonds though 2017 and an ex­cise tax on im­ported rum that ben­e­fits Puerto Rico and the Vir­gin Is­lands.

Se­nate Fi­nance Com­mit­tee Chair­man Or­rin Hatch, R-Utah, in­tro­duced the tax ex­ten­ders bill the day after the Se­nate ap­proved tax re­form leg­is­la­tion.

The Se­nate ex­ten­ders bill would con­tinue for 24 months more than a dozen tax breaks that ex­pired at the end of 2016, in­clud­ing a rum cover-over ex­cise tax that pro­duces rev­enue for Puerto Rico and the U.S. Vir­gin Is­lands to pay for lo­cal gov­ern­ment op­er­a­tions. The QZAB ex­ten­sion only goes through 2017 be­cause the new tax law ter­mi­nates tax credit bonds after Dec. 31. Other ex­ten­ders are en­ergy-re­lated, in­clud­ing a nuclear en­ergy pro­duc­tion tax credit.

Congress also will need to en­act a tech­ni­cal cor­rec­tions bill in the com­ing months to fix draft­ing er­rors and loop­holes in the new tax law.

“It is in­con­ceiv­able that Congress will not have to act early in the year on a tech­ni­cal re­form bill,” said Frank Shafroth, di­rec­tor of the Cen­ter for State and Lo­cal Lead­er­ship at Ge­orge Ma­son Uni­ver­sity. Shafroth said the “cat­a­clysmic rush” to en­act the leg­is­la­tion bore not even a re­mote com­par­i­son to the out­reach and de­lib­er­a­tions over the last tax re­form bill in 1986.

“Be­cause the leg­is­la­tion will have such a sig­nif­i­cant im­pact on in­creas­ing the fed­eral deficit and debt, it seems cer­tain that in­ter­est rates will rise, thereby in­creas­ing the cost of debt is­suance for not just state and lo­cal gov­ern­ments but also for schools and uni­ver­si­ties,” Shafroth said.

Mean­while, the U.S. Supreme Court is ex­pected to de­cide soon

whether to con­sider a case in­volv­ing South Dakota that would have na­tion­wide im­pact on the abil­ity of state and lo­cal gov­ern­ments to col­lect sale taxes on In­ter­net pur­chases.

In ad­di­tion, Congress may con­sider re­form­ing the In­ter­nal Rev­enue Ser­vice to make it more cus­tomer friendly, ac­cord­ing to House Ways and Means Com­mit­tee Chair­man Kevin Brady, R-Texas.

“My sense is that there could be broad bi­par­ti­san sup­port for re­struc­tur­ing the IRS,” Brady told re­porters on Dec. 18.

Brady said the tax bill left out pro­vi­sions that were dropped at the last minute be­cause of the Se­nate’s par­lia­men­tary Byrd rule as well as other pro­pos­als. Un­der that rule the Se­nate can­not in­clude non-ger­mane pro­vi­sions with­out rev­enue im­pli­ca­tions via the rec­on­cil­i­a­tion process or mea­sures that would add to the fed­eral deficit after the 10th year.

“This is not our last tax re­form,” Brady said. “I’m go­ing to rec­om­mend that we do have some form of tax rec­on­cil­i­a­tion in fu­ture bud­gets be­cause there are still ar­eas of the tax code I think and we think can be im­proved whether it’s re­tire­ment sav­ings, ed­u­ca­tion, stream­lin­ing and we had a num­ber of good ideas from our mem­bers we weren’t able to ac­com­mo­date.”

Fur­ther tax leg­is­la­tion could pro­vide an open­ing for mu­nic­i­pal bond mar­ket is­suers who think Congress left them in the lurch by not giving them a tran­si­tion pe­riod be­fore the ter­mi­na­tion of ad­vance re­fund­ings and tax credit bonds.

Congress also will get push­back in 2018 from state and lo­cal gov­ern­ments on its con­tro­ver­sial de­ci­sion to limit to $10,000 per house­hold the fed­eral de­duc­tion for prop­erty and in­come or sales state and lo­cal taxes.

“Cities will con­tinue to fight to fully re­store SALT and the ex­emp­tion for ad­vance re­fund­ing bonds,” said Na­tional League of Cities Pres­i­dent Mark Stodola, mayor of Lit­tle Rock, Ark.

U.S. Con­fer­ence of May­ors Pres­i­dent Mitch Lan­drieu, the mayor of New Or­leans, de­scribed the tax leg­is­la­tion as “a fullfledged as­sault on cities and the fam­i­lies who live in them.”

“This bill will make our cities harder to live in and harder to run ef­fec­tively –- all for the ben­e­fit of wealthy po­lit­i­cal donors,” Lan­drieu said.

Be­cause Congress re­pealed the in­di­vid­ual man­date re­quir­ing tax­pay­ers to pur­chase health in­surance, “Re­pub­li­can and Demo­cratic may­ors, not Washington politi­cians, will con­tend with emer­gency rooms fill­ing up with the sick and the unin­sured,” Lan­drieu said.

But the health in­surance man­date won’t ex­pire un­til the end of 2018.

The im­pact of the re­peal could be par­tially off­set be­fore then if Congress en­acts leg­is­la­tion to es­tab­lish high-risk in­surance pools at the state level and re­news fed­eral sub­si­dies for low-in­come peo­ple to pur­chase health in­surance. Re­pub­li­can law­mak­ers such as Sens. Su­san Collins of Maine and La­mar Alexan­der of Ten­nessee are hop­ing Congress will en­act bi­par­ti­san leg­is­la­tion with those fixes in 2018.

Congress, how­ever, is ex­pected to con­tinue re­sist calls by state and lo­cal gov­ern­ments to en­able to them to col­lect sales tax on In­ter­net pur­chases.

The ob­sta­cle has been House Ju­di­ciary Com­mit­tee Chair­man Robert Good­latte, R-Va., who has re­fused to con­sider leg­is­la­tion on In­ter­net sales taxes au­thored by Rep. Kristi Noem, R-S.D.

Good­latte has an­nounced he won’t run for re-elec­tion in 2018, but re­lief could come sooner from the Supreme Court.

South Dakota At­tor­ney Gen­eral Marty Jack­ley an­nounced Dec. 21 that the state filed its fi­nal re­ply in its re­quest for con­sid­er­a­tion by the high court.

“Based upon the sig­nif­i­cant im­pact this is­sue has on ev­ery Main Street busi­ness, it re­mains my hope that our high­est court will let us be heard,” Jack­ley said. “We have re­ceived ex­tra­or­di­nary sup­port from the State At­tor­neys Gen­eral, the Na­tional Gover­nors As­so­ci­a­tion, ed­u­ca­tional lead­ers, and the busi­ness com­mu­nity in the na­tional fight to bring tax fair­ness for our lo­cal re­tail­ers and to help sup­port main street busi­nesses.”

South Dakota is hop­ing the Supreme Court will de­cide whether to take the case by the end of Jan­uary, set­ting up the pos­si­bil­ity of a rul­ing by the end of the court’s term in late June.

The case is widely viewed as an op­por­tu­nity for the Supreme Court to take into ac­count tech­no­log­i­cal ad­vances since its 1992 rul­ing in Quill Corp. v. North Dakota, that sales tax col­lec­tions for on­line sales can only be re­quired if a re­tailer has a phys­i­cal pres­ence or “nexus” in a state.

South Dakota has no state in­come tax and is more re­liant on sales taxes for its bud­get than most states.

A 2016 South Dakota law re­quires outof-state re­tail­ers to col­lect and re­mit the sales tax sim­i­lar to in-state re­tail­ers if the re­mote sellers have more than $100,000 in sales or com­plete more than 200 sales trans­ac­tions per year within South Dakota.

After the law was en­acted, the state con­tacted large re­mote re­tail­ers ask­ing them to com­ply. The state then sued three that re­fused, re­sult­ing in the law­suit, State of South Dakota v. Way­fair, Over­stock and Newegg. South Dakota’s high­est court over­turned the law, set­ting the stage for the ap­peal.

States and lo­cal gov­ern­ments lost an es­ti­mated $26 bil­lion in po­ten­tial sales tax rev­enue in 2015 be­cause of on­line re­tail sales, ac­cord­ing to the Na­tional Con­fer­ence of State Leg­is­la­tures and the In­ter­na­tional Coun­cil of Shop­ping Cen­ters.

“I think the leg­is­la­tion, the way it is writ­ten, is ac­tu­ally a great op­por­tu­nity for states and lo­cal­i­ties to ad­dress the col­lec­tion of sales tax,” said Emily Brock, di­rec­tor of the Fed­eral Li­ai­son Cen­ter for the Gov­ern­ment Fi­nance Of­fi­cer As­so­ci­a­tion.

While on­line mer­chan­dise sales have ex­ploded, much of the sales tax is un­col­lectible, Brock said. “Lo­cal tax sys­tems ad­dress lo­cal needs and so does the im­po­si­tion of a sales tax,” she said. “It’s uti­lized ef­fec­tively across the coun­try.” ◽

“It is in­con­ceiv­able that Congress will not have to act early in the year on a tech­ni­cal re­form bill,” said Frank Shafroth at Ge­orge Ma­son Uni­ver­sity.

“My sense is that there could be broad bi­par­ti­san sup­port for re­struc­tur­ing the IRS,” House Ways and Means Com­mit­tee Chair­man Kevin Brady told re­porters.

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