Washington, D.C., Update – January 2018

Cadillac Tax Delayed in Latest Federal Budget Drama

On January 22, the president signed a stopgap spending bill to end a nearly three-day-long partial shutdown of the federal government. While much of the shutdown drama was focused on immigration, the spending bill does provide positive news on one of GFOA’s priorities. The bill includes a two-year delay of the 40% excise tax on employer-provided health benefits, pushing its effective date to 2022. Although GFOA policy supports full repeal of the tax, any delay in its implementation provides additional time for public employers to address rising health-care costs for employees.

The funding measure also reauthorizes the Children’s Health Insurance Program (CHIP) for six years. CHIP, which expired on September 30, 2017, covers approximately 9 million low-income children from families who are not eligible for Medicaid and lack health insurance.

The Senate passed the funding measure by a margin of 81-18 earlier on January 22, after party leaders reached an agreement to address the impending expiration of the Deferred Action for Childhood Arrivals (DACA) program. Because none of the prior proposals to extend federal funding provided deportation protections for the approximately 800,000 individuals who came into the U.S. as children and currently do not have lawful immigration status, Democrats in the Senate forced the shutdown, since 60 votes are needed to approve the measure.

Despite the agreement in the Senate and support on both sides of the aisle to address DACA, we may see a replay of this fight in just a few weeks. The bill signed on Monday only provides funding for federal programs and agencies through February 8. The federal government has been operating under stopgap funding since the fiscal year began on October 1, 2017.

Bank Loan Costs May Increase as a Result of Tax Reform (H.R. 1) Effective January 1, 2018

Governmental issuers that have private placement or bank loan debt are urged to check their loan documents. Many issuers may have clauses (formulas) in their bank loan documents that results in a downward change in the corporate tax rate, simultaneously increasing the interest rate on the bank loan or private placement of the issuer. This clause could result in higher debt service or other payments starting with next scheduled payment date.

Issuers are urged to check loan documents or to directly contact their banks as soon as possible to verify if their interest rates have been affected. Any questions should be immediately discussed with they organization’s municipal advisor and bond counsel. These rate changes may have already gone into effect as soon as January 1, 2018, when the tax reform legislation was fully implemented.

Issue of Remote Sales Tax to Have Its Day in Court
On January 12, 2018, the U.S. Supreme Court granted South Dakota’s petition of certiorari asking the court to hear its case and potentially overrule the 1992 decision in Quill Corp. v. North Dakota. South Dakota’s law is the first to be ready for review by the Supreme Court. Under the South Dakota law, remote retailers are required to collect and remit sales tax if they exceed a statutory threshold of sales into the state each year. In South Dakota v. Wayfair, Inc., retailers challenged the law as unconstitutional. Unsurprisingly, the South Dakota Supreme Court upheld the challenge, reasoning that it clearly violated Quill, and “Quill remains the controlling precedent on the issue of Commerce Clause limitations on interstate collection of sales and use taxes.”

In Quill, the Court held that states cannot require retailers that don’t have an in-state physical presence to collect sales tax. This has increased fiscal pressure on state and local governments because the retail market has substantially shifted to the Internet in recent years, resulting in billions in uncollected sales taxes due to the Quill standard. Since that decision, there have been several efforts at the state and federal levels to enact laws to try and alleviate the loss in sales tax revenue.

Notwithstanding the attempts to address the issue through legislation, Supreme Court Justice Anthony Kennedy wrote a concurring opinion in March 2015 stating that the “legal system should find an appropriate case for this court to reexamine Quill.” In the Direct Marketing Association v. Brohl case, Kennedy pointed to the fact that Internet sales have risen astronomically since 1992 and states and local governments remain unable to collect most taxes due on sales from out-of-state vendors.

Even though South Dakota’s petition has been granted, it remains undetermined if the case will be heard before the end of the current term or when the court’s next term begins later in the fall.