Washington Snapshot

Washington Snapshot: Tax Legislation Takes Effect

Thursday, January 4, 2018 - 1:25 pm EST

In This Week's Edition of Snapshot

Congress IconNews from the Hill

Tax Overhaul Takes Effect, Senate Finance Committee Chairman to Retire

On Dec. 22, 2017, President Trump signed the tax reform bill into law—with all changes under this legislation set to take effect on Jan. 1 (see here for a summary of how this legislation impacts philanthropy). Though the overhaul has become the law of the land, Congress will likely still pass an additional bill to correct technical errors that appear in the legislation—which will require 60 votes to pass in the Senate, and therefore, require Democratic support. Chairman of the House Ways and Means Committee Kevin Brady (R-TX) has indicated his preference to limit the bill to make only necessary changes, but Democratic leaders have suggested that they may push back.

The other big tax news of the week was that Senate Finance Committee Chairman Orrin Hatch (R-UT) will retire from Congress at the end of 2018—concluding his career as the longest-serving Republican senator. His departure opens the powerful chairmanship to another Republican member of the Finance Committee. Likely candidates include Sen. Chuck Grassley (R-IA), who will become the most senior Republican member of the committee once Sen. Hatch leaves, with Sen. Mike Crapo (R-ID) in line behind him.

Deadline to Pass FY ‘18 Spending Measure Looms

On Dec. 22, Congress passed a temporary stop-gap measure that funds the government through Jan. 19 and avoids a shutdown. As the Senate returned from their holiday recess yesterday and the House returns next week, House and Senate leaders face a tight deadline to prevent the government from grinding to a halt. Yesterday afternoon, the four congressional leaders—House Speaker Paul Ryan (R-WI), House Minority Leader Nancy Pelosi (D-CA), Senate Majority Leader Mitch McConnell (R-KY), and Senate Minority Leader Chuck Schumer (D-NY)—met with representatives from the White House to begin negotiations on a funding bill for the rest of fiscal year (FY) 2018.

According to The Wall Street Journal, “Aides to the top congressional leaders have been meeting with White House staff including Mr. [Marc] Short [White House director of legislative affairs] for weeks, but GOP leaders were focused on passing the tax overhaul, which squeaked through both chambers late last month. Now with the tax bill out of the way, aides said they were optimistic lawmakers could get closer to striking a budget deal, though sticking points remain.”

The potential sticking points include: raising the sequester budget spending caps that are set to kick-in due to a 2011 budget deal—(Congress has reached multiple deals since 2011 to avert the across-the-board spending caps from being triggered); legal protections for children who were brought undocumented into the U.S. that had been protected under the Deferred Action for Childhood Arrivals program (DACA), which was ended in September by President Donald Trump; and a reauthorization of the recently expired Children’s Health Insurance Program (CHIP).

Two New Senators Sworn In

Yesterday, two new Democratic senators were sworn in—narrowing the Republican majority to just one seat (51-49). Sen. Doug Jones (D-AL) replaces former Sen. “Big” Luther Strange (R-AL) after defeating Roy Moore in a special election last month. Sen. Strange, who was appointed as an interim senator when Jeff Sessions became the U.S. Attorney General, lost to Moore in a tight primary. According to NPR, “The upset victory by Jones narrowed Republicans' hold on the Senate to only one seat, 51-49. That's noteworthy going into a midterm election year, making Democrats' impossible path to a Senate majority now just improbable. They're still largely on defense, with 10 Senate Democrats up for re-election in states that President Trump won. But if they can flip the GOP-held Arizona and Nevada seats—which are highly competitive—and defend all their incumbents, there's a way.”

The day also saw the former Minnesota Lieutenant-Governor Tina Smith sworn in. Sen. Smith was appointed to replace Sen. Al Franken (D-MN), who announced his resignation last month after multiple allegations of sexual harassment. NPR also noted that, “Even though Jones won a special election for his seat and Smith was appointed, it's Smith who will have the seniority edge since she and Jones are being sworn in at the same time—simply because Minnesota is more populous than Alabama.”

With the addition of another Democrat in the Senate (Jones replacing Strange), there may be some tweaks to committee assignments. According to POLITICO, “Some logistical issues will also have to be worked out with a narrower Republican margin in the Senate. For instance, McConnell and Schumer are still discussing whether the number of seats allotted to each party on committees will be adjusted to reflect the smaller GOP majority, aides said.”

State Policy IconHappening in the States

Exclusive from our colleagues at the National Council of Nonprofits.

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State Legislatures Convene to Confront Uncertainty Caused by the Federal Tax Bill

January marks the beginning of legislative sessions in thirty-eight states, and the impact of the federal tax bill enacted just two weeks ago is top of mind for governors and legislators. Forty states link their tax laws to the federal code, yet the changes will affect states differently and require varied responses for legislatures. For instance, the standard deduction in 12 states automatically went up on January 1 because their tax codes follow the federal standard deduction; eight states match the federal personal exemption, which has now been repealed.

While a few states, such as Colorado and Maryland, may initially see increased revenues due to how their tax laws interact with the Internal Revenue Code, many more are predicting losses in tax receipts that could affect their budgets for the current fiscal year that typically ends on June 30. Any one change to federal tax law can knock state budgets out of alignment and the states are in no condition to absorb revenue losses. In 2017, 22 states suffered revenue shortfalls, making them unable to maintain services at existing levels. As regular readers of Washington Snapshot have seen, the ongoing Illinois budget crisis is legendary, while New Mexico and North Dakota are mired in at least their third straight year of spending cuts. Kentucky has a $1 billion budget hole and is already cutting human services, and Iowa expects to make cuts of between $45 - $90 million by June 30. Oklahoma doesn’t even have a budget for the Fiscal Year that started July 2017.

Growing budget deficits and the need to open up state tax laws make clear that the 2018 legislative session will be challenging for nonprofits and foundations. In “Nonprofits Must Move Swiftly to Fight for Sound Public Policies,” published yesterday in the Chronicle of Philanthropy, Tim Delaney and David L. Thompson of the National Council of Nonprofits translate these challenges into likely policy actions in the states. The article predicts attempts will be made to reconfigure state and local tax laws in ways that lead to new levies on tax-exempt entities, such as additional fees and payments in lieu of taxes (PILOTs) on nonprofit-owned real estate, penalties on nonprofit salaries, and excise taxes on some endowments. Further, as governments at all levels are forced to cut spending, more work will likely fall on nonprofits to help people hurt by the spending reductions. The article explains, “Expect nonprofits to have to seek more money from foundations to cover those costs — think of it as a new tax on philanthropy to subsidize decisions of politicians.”

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