$10,000 cap for state and local deductions in federal tax bill could limit school revenue growth
Jason Bailey, executive director of the Kentucky Center on Economic Policy, says that's because property and other taxes, key funding components for Kentucky schools, are 100 percent deductible under the current federal tax code, making it easier for school districts and other governmental entities to increase tax rates for more funding if necessary.
LOUISVILLE, Ky. (WDRB) -- Setting a $10,000 cap on state and local tax deductions, as recommended in a federal tax overhaul approved by Congress on Tuesday, could make it harder for public school districts to generate more revenue in the future.
Jason Bailey, executive director of the Kentucky Center on Economic Policy, says that's because property and other taxes, key funding components for Kentucky public schools, are 100 percent deductible under the current federal tax code, making it easier for school districts and other governmental entities to increase tax rates for more funding if necessary.
The $10,000 limits on state and local tax deductions likely would only impact top earners in the state, he said.
"To pay $10,000 in those taxes is pretty significant, so it's really only upper-income people, wealthier people who will not get as much of a deduction," Bailey said. "... It doesn't really cut funding to education directly at all, but it just reduces the subsidy to state and local governments of taxing people to pay for education."
Eric Kennedy, director of governmental relations for the Kentucky School Boards Association, said while his organization didn't see a direct funding impact for school districts across the state, the tax legislation "would make it politically and practically more difficult to increase property taxes by school districts because of the impact on the taxpayer for their federal liability."
"So in that respect it is a concern for us, and honestly, adding to that concern is that for the last 10 years at least, if not longer, more and more of the overall financial investment in schools is being borne by the local school districts with their local taxes," Kennedy said.
The National Education Association predicts that if the federal tax bill passes, $989.4 million in local education revenue could be at risk in Kentucky over the next 10 years. For Indiana, that number is $948.8 million over a 10-year period.
"I just know that we can't afford any more reductions in public education dollars, mainly because of our crisis with state funding that we're in," said Kentucky Education Association President Stephanie Winkler. "If we add federal spending cuts on top of that, we're going to be in a world of hurt, especially our rural eastern Kentucky counties. Some of them are not going to make payroll next or are close to having to close."
Earlier versions of the federal tax bill eliminated state and local tax exemptions entirely, but lawmakers added the $10,000 cap during conference negotiations.
Jordan Harris, founder and co-executive director of the Louisville-based Pegasus Institute, said he would have liked state and local tax deductions -- known as "SALT" -- eliminated entirely as part of federal tax reform, but he added that concerns on the bill's impact on local education funding have "some level of legitimacy."
"The SALT exemption as it was put in place really propped up some of the high-tax states to have higher property taxes and higher income taxes overall, so there's no doubt that some states like New York and California, Illinois, other states that are generally high-tax states are going to have to re-evaluate aspects of their tax structure," Harris said.
"So there is some legitimacy, I think, in the concern that it could impact school boards' abilities to increase local taxes, to increase property taxes. I think ultimately what's going to happen is that those states are going to end up re-evaluating some of the tax structure at the top, and I think we're going to see income taxes get reduced, income tax rates get reduced in states like New York, California, Illinois and the (tax) base broadened significantly in some of those places, and so it probably ultimately will not have that impact that that concern is there for."
With so many moving parts in the tax legislation as a whole and the various personal experiences of taxpayers, Goldburn Maynard, an associate professor at the University of Louisville Brandeis School of Law, cautioned against making snap judgments on exactly how the bill's various components will work together, saying some have been "overselling" its impact.
"This bill pulls so many policy levers that it's hard to figure how folks' behavior will change after the bill is passed, so it's really difficult to figure out exactly what's going to happen," Maynard said. "So I think we should be really honest about that from the get-go."
Still, removing indirect subsidies in higher state and local tax deductions available to taxpayers could force some difficult financial decisions, Maynard said.
"Education may be one of those areas that is affected because a lot of education funding comes from things like property taxes, state income taxes, et cetera," he said.
For Bailey, passing the federal tax bill adds another concern.
The legislation would add an estimated $1.5 trillion to the national deficit, which Bailey fears could put education cuts in play for Congress during budget talks next year.
"It looks like Congress is going to in 2018 say that we have a huge deficit and have to cut spending, and a portion of that is federal education dollars that are at risk," Bailey said.
Reach reporter Kevin Wheatley at 502-585-0838 and firstname.lastname@example.org. Copyright 2017 WDRB News. All rights reserved.