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Federal Tax Reform Proposals Impact Bonds, Property Tax Deduction

[An update to this article​ was posted Dec. 11.]

The federal tax reform proposals that are currently advancing in Congress include provisions of interest to counties. Specifically, both the House and Senate proposals affect certain bonds utilized by local governments and impact the state and local tax (SALT) deduction on federal income taxes.

The House version of the legislation, which passed the chamber on Nov. 16, eliminates the tax-exempt status of advance refunding bonds and private activity bonds. Advance refunding bonds allow local governments to take advantage of lower interest rates by refinancing to save taxpayers money, while private activity bonds help finance certain infrastructure in local communities.

The current tax-exempt status of these bonds allows local governments to qualify for lower interest rates when the bonds are issued. Eliminating the tax exemption for investors who purchase them could increase costs to local governments and affect infrastructure development.

The Senate version that passed out of the Finance Committee on Nov. 16 may receive a full Senate vote soon. It retains the tax exemption on private activity bonds, but eliminates the tax-exempt status of advance refunding bonds.

Both the House and Senate versions of the bill also differ with respect to the current SALT deduction, which allows itemizers to deduct state and local property and sales taxes. The House version caps the deduction for property taxes at $10,000 and eliminates it for sales taxes. The Senate version repeals the deduction entirely.

Congressional leadership has set forth an aggressive timeline for passage of a final tax reform bill – aiming to pass a bill before Christmas. However, it remains unclear when a final bill might pass. Any differences between the House and Senate versions will likely be negotiated in a conference committee.

The National Association of Counties (NACo) has additional information about the House and Senate tax plans and their impact on counties on its website.

County officials with concerns about the proposed tax plans may want to contact members of their congressional delegation.