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Where Are Washington’s Policymakers Headed Next Year?
By: Tony Roda, Williams & Jensen
The voters deal the cards, and your advocates in Washington play the hand they're dealt—deciding which cards to play as they shape a strategic legislative game plan.
The voters deal the cards, and your advocates in Washington play the hand they're dealt. I don't think I'm responsible for that turn of phrase, but I like it, and it's undeniably true.The voters deal the cards, and your advocates in Washington play the hand they're dealt—deciding which cards to play as they shape a strategic legislative game plan.
On November 5, the voters elected Donald Trump to a second, nonconsecutive term as President. This is the first time this has occurred since Democrat Grover Cleveland achieved this distinction as our 22nd and 24th Presidents in the late 1800s. The voters also maintained the House Republican majority and flipped the Senate to Republican control. The House result was always too close to call, but the Senate was widely expected to move into the Republican column.
Now that we have the cards, we can begin to determine which to play and which ones to discard. In other words, we have to plot a legislative advocacy strategy that is both offensive minded, where it makes sense, and one that sets up defensive blocks to proposals we oppose, all of which will depend on the political dynamics of the next President and Congress.
State and local governmental retirement plans must meet the qualification requirements of the federal tax code, Section 401(a), in order to maintain their tax-advantaged status. The tax advantages include that employer contributions to the pension trust on behalf of the employee are not taxable income to the employee (income or FICA taxes) until retirement distributions are made, and neither the trust nor the plan participants are taxed on the ongoing investment earnings of trust assets. A consequence of the tax qualification requirement is that Congress has a jurisdictional hook to set some underlying rules on how state and local plans operate.
Given this situation, a significant part of our work in 2025 will be devoted to ensuring that we advance positive changes to federal tax law and prevent unwelcome changes from being enacted. We will have to navigate the consideration of far-ranging tax legislation to extend the 2017 tax law, known as the Tax Cuts and Jobs Act (TCJA). Most provisions of TCJA will expire at the end of calendar year 2025.
As I mentioned in last month's Monitor article, the Tax Foundation, a Washington, D.C. think tank, has estimated that full extension of the TCJA would result in $4 trillion less in federal tax revenues over the next 10 years – a massive amount. That figure does not include the new tax cut proposals that President-elect Trump touted during the campaign, namely repealing the taxation of Social Security benefits, tips, and overtime. In the aggregate these three new tax proposals will further reduce federal revenues over the 10-year period by an additional $1.85 trillion.
Tax legislation of this magnitude has never been attempted by Congress, and offsetting the revenue losses, now up to almost $6 trillion when you include the new tax cut proposals, will require a search for revenue raisers that is without precedent as well. It is likely that not all of the revenue losses will be offset, but even trying to offset 50 to 70 percent of $6 trillion will be an all-hands-on-deck exercise.
On the defensive side of the ledger, bear in mind that the original House-passed version of TCJA contained a provision to specifically subject investments of state and local governmental pension plans to the Unrelated Business Income Tax (UBIT). Analysis of the provision at the time concluded that UBIT would cover certain private equity, limited partnership, hedge fund, and debt-financed investments. NCPERS, among other stakeholders, took the lead in lobbying against this provision, and it was not included in the final TCJA. However, given the enormity of the search for new revenues discussed above, the UBIT proposal may resurface in the next Congress, and we would be wise to plan and act accordingly.
On the offensive side and specifically related to retired first responders, the next round of tax changes could bring about an increase in the annual cap under the Healthcare Enhancement for Local Public Safety Act (HELPS). The SECURE Act 2.0 made direct payment under HELPS optional and created an alternative to the original method by allowing the retirement system to make the distribution to the retired public safety officer. The retiree can now make the premium payment to the insurance provider and remain eligible for the up to $3,000 per year tax exclusion. Successfully fixing the direct payment requirement in the SECURE Act 2.0 now allows NCPERS and others in the public safety stakeholder community to focus on increasing the annual exclusion cap. The $3,000 cap has not been increased since its inception in 2006 despite significant increases in premiums for health care and long-term care insurance over the past 18 years.
In addition, numerous retirement-related provisions in the tax code are indexed for inflation, including annual limits for contributions to 401(k), 457(b), and 403(b) accounts. This is done as a matter of fairness for taxpayers. During consideration of the next tax bill, we expect discussions on whether to index the HELPS annual exclusion for inflation in future years.
Also on the first responder front, S. 4267 (117th Congress), which was introduced by Sen. Michael Bennet (D-CO), who is a senior member of the tax-writing Finance Committee, would create a new tax credit for retired first responders for health care premiums of up to $4,800 per year.
Please know that NCPERS will be closely monitoring tax legislation in the next Congress. We will look for opportunities to advance our offensive agenda, and play defense where necessary. We will keep you apprised of significant developments as the new Congress gets underway.
We invite you to join us next month in Washington for NCPERS Legislative Conference & Policy Day to deepen your understanding of the policy developments that may impact public pensions and to strengthen your ability to advocate effectively with lawmakers.
Tony Roda is a partner at the Washington, D.C. law and lobbying firm Williams & Jensen, where he specializes in legislative, regulatory, and fiduciary matters affecting state and local pension plans. He represents the National Conference on Public Employee Retirement Systems and state-wide, county, and municipal pension plans in California, Colorado, Georgia, Kentucky, Nebraska, Ohio, Tennessee, and Texas. Tony has an undergraduate degree in government and politics from the University of Maryland, J.D. from the Catholic University of America, and LL.M (tax law) from the Georgetown University Law Center
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