Spring 2018 issue of Horizons

This study indicated that a significant hit would be felt at the polls, as taxpayers will be much less likely to approve property tax increases to pay for bond issuances or for percentage sales tax increases, based on the lack of deductibility of these items which would effectively “double tax” individuals who reside in those areas. The largest impact of this change is expected on K-12 schools and infrastructure projects, which are 90% and 75% funded through state and local taxes, respectively. This is on top of future federal proposals, which are projected to require significantly larger shares of local budget commitments to receive additional federal grant dollars for both education and infrastructure projects. These proposals could lead to significant decreases in the operating budgets for school districts and county infrastructure plans, and will likely delay significant projects until other funding sources are coordinated. Income Tax Bases Another significant change that will influence state governments and their budgets indirectly is the change of income tax bases to individual taxpayers. State income taxes for 41 of the 50 states are linked to the federal income tax bases in some way, shape or form, whether the base for calculating state income tax uses federal income tax, an individual’s adjusted gross income or uses the federal standard deduction in the calculation to arrive at an individual’s state income tax liability. As the federal tax policies change for the individual, the amount of tax an individual pays in state taxes is expected to increase as well based on the reductions in allowances and deductions. Based on a Pew Charitable Trust Report (2016), even with a revenue neutral change on the federal level due to decreasing federal taxable rates and eliminating tax deductions, states that conformed to federal tax bases could see significant impacts on the change in income tax received during the year.

It would also affect governments looking to fund significant projects through levying new revenues from either of those vehicles. A report by Kim Rueben (Revisiting the State and Local Tax Deduction, 2016) indicates that this would incentivize local governments to shift a larger portion of their revenue base to increased fees and other charges for services, instead of increasing taxes. In addition, states could also respond by removing deductions from state income tax returns in order to compensate for the lost potential income from sales and property tax, similar in effect to what the Act did for federal income tax returns. The potential for this shift in state and local government funding is supported by a study by Michael Leachman (Center on Budget and Policy Priorities, 2017).

46 Municipalities Feel the Pinch When Complying with the New Tax Law