December 7, 2017

With just a handful of legislative days remaining on the 2017 calendar, House and Senate lawmakers spent the week of December 4 focused on several major unfinished items, including the fiscal year 2018 budget.  Currently funded by a stopgap Continuing Resolution (CR) that expires at midnight on December 8, federal agencies and the programs they operate must receive fresh spending authority from Congress to avoid a partial government shutdown.

At press time, the House was expected to vote on a two-week spending bill (HJ Res 123) that would keep federal departments operating through December 22.  The Senate will likely consider the short-term CR on Friday.  The temporary measure will buy congressional leaders and the White House additional time as they search for a bipartisan agreement on a long-term budget.

At issue within the debate are a number of competing interests dealing with both spending levels and policy matters.  On the spending side of the ledger, congressional Republicans are seeking billions of additional dollars in fiscal year 2018 defense funding.  For their part, Democrats are insisting that any increase for the Pentagon must be paired with commensurate boosts in domestic discretionary spending.  Because 60 votes will be needed to advance a long-term budget in the Senate, Democrats will hold a significant degree of leverage in the final negotiations. 

In addition to increased funding for domestic programs, many congressional Democrats want the final budget package – or an alternative legislative vehicle – to provide a permanent legislative solution for Deferred Action for Childhood Arrivals (DACA) recipients.  In the wake of President Trump’s decision to rescind the program beginning next March, Democrats, along with a group of Republicans, have been urging passage of a statutory framework that would extend legal protections for children of undocumented individuals who arrived in the United States before age 16.

While it appears as though the White House and congressional Republicans may be open to a deal on DACA, such a capitulation would likely come with other immigration-related conditions, including an insistence that Congress provide money for President Trump’s border wall.  It remains too early to tell if these and other provisions will be swept up in any potential final fiscal year 2018 budget bill.

Disaster Supplemental

On a related budget item, members of Congress may consider before the end of the session a third fiscal year 2018 emergency supplemental spending bill to help pay for recent disaster events.  On November 17, President Trump sent to Congress his administration’s latest request for billions of dollars in federal disaster aid to help Puerto Rico, Texas, and Florida recover from the destruction caused by hurricanes and flooding.  The White House did not, however, request any direct federal aid to help the people of California who were impacted by the state’s devastating wildfires.

In response to being left out of the Trump administration’s disaster package, all 53 members of the California congressional delegation sent to the chair and ranking member of the House Appropriations Committee a recent letter urging them to include $4.4 billion in wildfire relief funding as part of the supplemental disaster relief legislation.  Senators Dianne Feinstein and Kamala Harris also have been active in pushing for desperately needed disaster funds for California.  The political pressure brought to bear by the California delegation – paired with calls from Texas and Florida members that the administration’s disaster request is inadequate – likely means that Congress will scrap the White House’s spending plan and write its own supplemental disaster-aid bill.

Children’s Health Insurance Program

The aforementioned two-week CR includes support for several states that are low on funding for the Children’s Health Insurance Program (CHIP).  While most states are not projected to run out of CHIP funds until early next year, several states are expected to expend their entire funding allotments by the end of December.

In the absence of renewed authority for the CHIP program, which officially expired on September 30, the Trump administration has been providing certain states with “redistribution” funding (which are CHIP dollars that weren’t spent in prior years).  In October, five states, one of which was California, received CHIP redistribution funds.

Looking ahead, it is unclear if a long-term CHIP renewal will cross the legislative finish line this year.  Although both chambers have advanced their respective versions of a multi-year CHIP bill, there continues to be disagreement over how to pay for the legislation.

Tax Reform Talks Continue

This week, the House and Senate formally agreed to go to conference, where lawmakers from both chambers will work to reconcile the differences between their separate tax bills.  House Ways and Means Committee Chairman Kevin Brady (R-TX) will head the committee.  Other members of the committee were named by congressional leaders earlier this week, with the exception of Senate Democrats, who have yet to name their conferees.

Unlike previous conference committee meetings, the panel is only expected to convene one formal meeting in open session, with most of the negotiations occurring behind closed doors.  No Democrats are expected to support the final agreement.  As a result, it is unlikely they will have much input in the final conference report.  Once a majority of the members serving on the committee sign off on the agreement, it will then go to the full House and Senate for a final vote.  It should be noted that, with a few minor exceptions, neither chamber will be able make changes to the agreement during floor consideration.

There are a number of distinct differences between the two bills that will need to be ironed out.  CSAC is concerned about several key provisions that would negatively impact California’s counties, including:

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.  Both bills would eliminate the deduction for income and sales taxes, and would cap the deduction for property taxes at $10,000.  It should be noted that corporations would still be able to fully claim the SALT deduction.

The partial elimination of SALT will remain a sticking point during conference deliberations, particularly for Republicans from higher-tax states.  In fact, 13 GOP lawmakers voted against the House tax package – including California Representatives Darrell Issa, Dana Rohrabacher, and Tom McClintock – due in large part to concerns about SALT.  In an effort to appease these members, GOP leaders have signaled a willingness to compromise on the issue.  While it’s unclear how it will ultimately be addressed, one proposal would allow taxpayers to deduct property and income taxes up to a certain limit.

For their part, Congressmen Leonard Lance (R-NJ) and Josh Gottheimer (D-NJ) have submitted a bipartisan proposal to the conference committee that would, among other things, fully preserve the SALT deduction.  CSAC supports the county elements of the Lance-Gottheimer amendment and will be urging the committee to consider adopting the language in the final conference report.  Incidentally, neither member serves on the committee, and it is unclear if there will be any opportunity for a vote on the amendment.

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.  In fact, over the past decade, approximately 36 percent of PAB’s in California have been used to finance affordable housing units, 40 percent has gone to fund hospital construction, and the remaining 14 percent has been used to build schools.  Under current law, investors are not required to pay federal income tax on interest earned from most bonds issued by state and local governments.  The effect of this tax exemption is that local governments receive a lower interest rate on their borrowing than they would if their interest was taxable.  While the Senate bill would preserve this exemption, it would be eliminated under the House tax plan. 

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.  It should be noted that PAB’s and advance refunding bonds account for roughly half of the municipal bond market.

Repeal of ACA Individual Mandate

The Senate tax package 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 is likely to have strong support among House Republicans.  Without a mandate, it is likely that a percentage of the population, particularly those that are younger and healthier, will choose to go without health insurance coverage.  Those left in the insurance pool would generally be older and sicker, which would essentially force premiums to rise more than they otherwise would. 

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 be without health insurance.  CSAC is concerned that any increase in the uninsured population would further strain county resources