Last May three+one was out in front of the potential upcoming tax reform. We identified a trend around the removing of state and local income and property taxes as a tax deduction and the impact on public entities.

The trend we identified is now front and center.

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The release last week of a newly proposed tax plan for individuals and companies appears to provide tax relief for all taxpayers. What it will look like after it goes through Congress will be anyone’s guess.

 

A Taxing Deduction

 

As I start to dig into the preliminary details, the deduction of state and local income and property taxes would be eliminated.

While this may seem minimal to some individuals living in low-taxing communities, the impact to residents in heavily taxed states could be significant. You can be sure the offset of these deductions will be reviewed and analyzed over the coming months.

A Taxing Deduction

In the federal government’s previous tax plans, the deduction for sales taxes was eliminated. At the time that was very controversial, and very negative long-term consequences were foreseen. Today the loss of those past deductions is nothing but a faint memory, but the loss of deductions for property and income taxes would have a much greater impact.

As we tour nationally, we continue to see public entities with healthier balance sheets. This encouraging trend speaks to a healthier underlining economy nationally. That said, these entities will likely need to look to other sources of income as the public will have less appetite for any increases in property, sales, or state income taxes.

It is always smart to explore alternative options to raise revenue. One way to increase your total annual revenue by .25 to .30% is to proactively manage all your operating and non-operating cash. While that percentage may seem small, it could very well lead to tens to hundreds of thousands of new dollars of revenue.

A Taxing Deduction

With a rising rate environment, one could also see annual income on cash increase by another 100%+ over the next year or two. This increase could help temper the need to raise taxes for cost-of-living increases, health premium increases, capital projects, or project budget deficits caused by tax caps or public votes.

Cash in today’s marketplace has a value of at least 1.0% or more, leading to a potential source of new income that could have a major effect on your bottom line, this year and next.

Taxpayers in heavily taxed states or localities (even with lower tax brackets) will be more sensitive to any tax increases if they do not see a benefit—even if it was only for a tax deduction. Whatever efforts you take that use innovative thinking to offset the loss of these deductions will be well received by your state’s taxpayers.

At three+one, we can help you identify the value of your operating and non-operating cash and, through your banking institution(s) or Registered Investment Advisor (RIA), turn it into an asset that will have significant value in the marketplace and improve your bottom line immediately.

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PA GFOA – October