Letter to House Ways & Means Committee on Tax Reform
April 02, 2013
On behalf of the more than three million members of the National Education Association, we would like to offer our views in connection with the March 19 hearing, “Tax Reform and Tax Provisions Affecting State and Local Governments.”
Public education is the single biggest item in the budgets of America’s state and local governments (Source: U.S. Census Bureau). It is also arguably the single most important function of state and local governments. As the United States Supreme Court said in its unanimous decision, Brown v. the Board of Education:
“[E]ducation is perhaps the most important function of state and local governments … it is doubtful that any child may reasonably be expected to succeed in life if he is denied the opportunity of an education. Such an opportunity, where the state has undertaken to provide it, is a right which must be made available to all on equal terms.”
In light of these realities, it is imperative to consider how public education and our nation’s children are impacted by tax reforms and modifications of tax provisions affecting state and local governments. In particular, we are concerned by proposals to eliminate tax-exempt municipal bonds and deductions widely used by the middle class (e.g., for state and local taxes, and interest payments on home mortgages) in order to lower the top federal income tax rate dramatically.
Tax-exempt municipal bonds are the main way of financing public infrastructure needs, including construction of primary and secondary schools. Eliminating tax-exempt municipal bonds would raise borrowing costs substantially, making it even more difficult for struggling state and local governments to rebuild their crumbling infrastructures.
In addition to depressing necessary infrastructure investments, eliminating the federal deduction for state and local taxes would undermine equality of opportunity. State and local public spending would decline, and the federal tax burden would shift away from low-tax states and to high-tax states, exacerbating the inequalities that already exist.
“For example, in 2008, potentially deductible state and local taxes in New York comprised approximately 9.1% of total personal income whereas deductible taxes in nearby Delaware accounted for approximately 4.7% of total personal income … If the federal government reduces tax rates to maintain revenue neutrality—the base is larger with the elimination of the deductibility allowing for lower rates to yield the same revenue—then the effect is even more pronounced. The higher the state and local tax burden (as a percentage of total income), the lower the new federal tax rate would be under revenue neutrality.” (Source: Congressional Research Service, Federal Deductibility of State and Local Taxes, September 2012)
Ending or capping the home mortgage interest deduction would be similarly ill-advised. It is widely believed that the value of this deduction is embedded in home prices. If it were eliminated, the ongoing economic recovery could falter and home prices plummet again. That, in turn, would reduce revenues from property taxes. The implications are profound, especially for K-12 public education:
“The property tax is the financial backbone of local governments and school districts, accounting for nearly three-quarters of total local tax collections. It is the most significant local revenue source for financing K-12 education, police, fire, parks, and other services provided by local governments. In 2010, about 29 percent of total K-12 funding was supported by local property taxes.” (Source: Rockefeller Institute, University at Albany, State University of New York, The Impact of the Great Recession on Local Property Taxes,” July 2012)
Instead of these counterproductive steps, we urge Congress to support the Marketplace Fairness Act. In most states, brick and mortar stores are placed at a competitive disadvantage because they must collect sales taxes while sellers located outside their states do not. The U.S. Supreme Court (Quill Corp. v. North Dakota) said that Congress has the authority to allow states to require remote sellers (a retailer that does not have a physical presence in a state) to collect taxes.
Historically, small businesses have been one of the main engines of job creation. In the last decade, they created more than 60 percent of net private-sector jobs. We need to ensure that they not only survive, but thrive and help rebuild the economy.
The alternative source of revenue provided by the Marketplace Fairness Act would also help compensate for the losses endured during the recent housing crisis. Local property tax revenues, which account for 40 percent of public education funding, remain depressed. Combined with federal and state spending cuts, these losses have resulted in substantial reductions in core education programs and services. The Marketplace Fairness Act can help undo the damage.
The bottom line is that debate over tax reform cannot be merely driven by tax policy concerns. Congress must also consider how contemplated policy changes would affect our nation’s human capital, especially the children who are the public school students of today and the leaders of tomorrow.
We thank Committee for the opportunity to present these views. NEA looks forward to working with you to craft sensible tax reform and tax provisions affecting state and local governments.
Director, Government Relations