The special election in Alabama this week could have significant consequences for President Trump’s legislative agenda, but may not have much impact on federal tax reform. Democratic candidate Doug Jones defeated Republican Roy Moore and will soon represent Alabama in the U.S. Senate. Once he takes office, it will further narrow the GOP’s already thin majority to 51 Republicans and 49 Democrats.  However, Jones will not be sworn in until January and is therefore not expected to have an impact on the current effort to overhaul the tax code, unless it somehow slips into the New Year. 

In fact, the election results may have provided additional incentive for Republicans to act on tax reform before the Christmas break. Accordingly, congressional leaders worked quickly this week to reconcile the differences between the House and Senate tax bills. As of this writing, a number of provisions are still being finalized, but Republicans in both chambers have reached an agreement in principle on some of the most contentious issues (more on this below).

Congressional leaders are expected to release final legislative text by Friday, with floor action scheduled for early next week.  The Senate will likely act first with a vote on final passage expected to occur as early as December 19. The budget reconciliation process allows Republicans to clear a tax-code rewrite with a simple majority vote, rather than the 60 votes that are typically required to pass most legislation.  Democrats remain united in their opposition, so Republicans can only afford to lose two votes from their caucus to successfully approve the measure. 

Senator Bob Corker (R-TN), who has concerns about increasing the national debt, was the only Republican to oppose an initial version of the bill.  Nothing in the conference report is expected to address Corker’s concerns, but he has not ruled out voting for the final product.  Several other Republican senators – including Senators Marco Rubio (R-FL) and Susan Collins (R-ME) – have indicated that they are undecided.  In fact, Senator Rubio has threatened to oppose the bill unless it further expands the Child Tax Credit to help lower-income workers. 

Despite these potential setbacks, Majority Leader Mitch McConnell (R-KY) has expressed confidence that the bill will pass next week.  If the Senate is ultimately able to approve the legislation, the House is expected to act quickly on the final conference report.  GOP leaders in the lower chamber are optimistic they will be able to clear the measure by Tuesday night, paving the way for President Trump to sign the tax package into law by December 20.

For its part, CSAC has remained active in advocating for the association’s tax-related principles and sent recent correspondence to House and Senate leaders on the conference committee outlining California counties’ biggest issues of concern.  Below are several of the provisions that CSAC highlighted:

State and Local Tax Deduction (SALT)

Under current law, taxpayers can deduct their state and local property taxes, as well as their state income taxes or sales tax.  This benefit, which has been in place since 1913, provides counties with some measure of autonomy over their own tax systems and also incentivizes local investment in long-term infrastructure projects and various county services.  The House and Senate versions of the bill proposed to eliminate the deduction for income and sales taxes, while capping the deduction for property taxes at $10,000.

In an effort to address the concerns of members from high-tax states, the final conference report would allow taxpayers to deduct property and income or sales taxes up to a combined cap of $10,000.  While this change does not alleviate all of CSAC’s concerns, it does represent a slight improvement from the previous proposals.

Private Activity Bonds and Advance Refunding Bonds

Private Activity Bonds (PAB) are widely used to attract private investment for projects that have some public benefit.  Under current law, the interest earned on qualified PABs is exempt from taxation.  The effect of this tax exemption is that local governments receive a lower interest rate on their borrowing than they would if the interest was taxable.  The House bill proposed to eliminate this exemption, but the final package is expected to preserve the tax exempt status of PABs.

Advance refunding bonds, on the other hand, allow counties to refinance outstanding bonds to take advantage of better terms and rates.  Counties are only able to engage in a tax-exempt advance refunding once over the life of the bond.  Both the House and Senate tax plans would eliminate this exemption. As of this writing, it is unclear whether this exemption will be preserved or eliminated in the final conference report.

Repeal of ACA Individual Mandate

The final tax package is expected to retain a provision from the Senate bill that would repeal the mandate under the Affordable Care Act (ACA) that individuals purchase health insurance. The provision, which would save the federal government more than $300 million over the next decade, was not included in the House measure, but has strong support among House Republicans.  The Congressional Budget Office (CBO) estimates that repealing the individual mandate would increase average premiums on the individual market by about 10 percent.  CBO also projects that an additional 13 million people will choose to go without health insurance.  CSAC has serious concerns that any increase in the uninsured population would further strain limited county resources.

Disaster Deduction

Under current law, individuals and businesses can claim casualty losses on personal property as itemized deductions. Casualty losses can occur as a result of natural disasters, which includes wildfires, earthquakes, and floods, among other things.  The House bill would eliminate the deduction for personal losses from wildfires, earthquakes and other natural disasters, but it would preserve the benefit for victims of recent hurricanes.  The Senate version, on the other hand, would only retain the deduction if there is a national disaster declaration.  At this point, it is still unclear how this issue will be addressed in the final measure.  However, CSAC has continued to urge conference negotiators to reject provisions in both bills that would discriminate against victims of wildfires, earthquakes, floods, and other natural disasters.