Washington Snapshot: A Budget Deal Could Be Reached Before August Recess; States Sue to Challenge IRS SALT Workaround Rule

In This Week's Snapshot...


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A Budget Deal Reached?

According to Treasury Secretary Steven Mnuchin this morning, the Trump administration and congressional leaders have "reached an agreement" on overall spending levels in a two-year deal to raise the budget caps, in addition to settling on a two-year debt limit increase. In addition to “structural” issues, talks will continue about the offsets for the spending increases.

Any agreement would raise discretionary spending caps for 2020-2021, as well as increase the debt limit. Mnuchin has warned that the Treasury Department will reach its borrowing limit in early September, raising the urgency for a deal before Congress leaves town for the August recess. Recent projections show the federal deficit will reach approximately $1 trillion this year.

Democrats have demanded increases in military and non-military spending. Speaker Nancy Pelosi also wants a $22 billion boost over the next two fiscal years for veteran’s health care.

Senate Majority Leader Mitch McConnell and Republican senators are urging President Trump to accept an agreement with Democrats that would avoid stiff budget cuts, steer clear of a potential default and provide a huge measure of certainty through the presidential campaign.


The House holds Attorney General William Barr and Commerce Secretary Wilbur Ross in Contempt Over Census Subpoenas

In a conflict over ignored subpoenas relating to the Census 2020 citizenship question, the House voted Wednesday night to hold Attorney General William Barr and Commerce Secretary Wilbur Ross in contempt of Congress Wednesday night. Although President Trump dropped the question last week, he did issue an an Executive Order directing federal agencies to provide administrative records on citizenship to the Census Bureau. This likely includes a sweep of the requested information about individuals who receive federal benefits or participate in federally funded programs. Roll Call reports that the goal of the Administration is to provide States citizenship data for redistricting purposes after the 2020 Census.


House Repeals the ACA Cadillac Tax

On Wednesday, the House voted to repeal the Affordable Care Act's levy on high-priced employer-provided insurance. Should the Senate follow suit, that would mean Congress would have come together to toss out close to $200 billion in revenue between 2022 and 2029, without offsets. More immediately, it also raises the question of whether key senators would look to take this revenue bill, H.R. 748 (116) and seek to add on some of their own tax priorities.


Executive & Regulatory News IconExecutive & Regulatory News

Department of Agriculture Scientists Relocated from Washington, DC

The Administration has made a decision to move researchers from two wings of the USDA, the Economic Research Service (ERS) and the National Institute of Food and Agriculture (NIFA) from DC to the Kansas City area. ERS employees analyze the agricultural market, but their research is much broader and includes analysis of subjects such as food stamps, rural poverty and conservation. NIFA employees work with universities to fund research and coordinate the issuance of research grants on agriculture-related subjects, including climate change adaptation.

The staff had until July 15 at midnight to agree to move to the new Kansas City location or be fired. The majority have rejected the relocation and reassignment.


Federal Reserve Board Beige Book Published

The Federal Reserve Board’s report on current economic conditions, commonly known as the Beige Book, is published eight times per year. The most recent released earlier this week. Essentially, the nation’s economic activity continued to expand at a modest pace overall from mid-May, employment grew at a modest pace, and price inflation was stable. Find individual reports here for the twelve Federal Reserve Districts.


State Policy IconHappening in the States

States Sue to Challenge IRS SALT Workaround Rule

Yesterday New Jersey and New York, along with Connecticut, sued the Trump administration challenging Internal Revenue Service (IRS) rules that outlaw certain workarounds to the cap on state and local tax deductions—Politico reported.

The 2017 federal tax law imposed a $10,000 cap on state and local tax deductions, which officials in high tax states like New York and New Jersey say disproportionately impacts their residents. New York Gov. Andrew Cuomo, New Jersey Gov. Phil Murphy and others have argued this was an intentional act by Republicans in Washington to try to pay for other parts of the sweeping legislation by targeting blue-leaning states.

The lawsuit, filed in the Southern District of New York, argues the IRS is making a “radical break with historical precedent” and seeks an injunction. Not only is the IRS rule arbitrary and outside of the agency’s statutory authority, the lawsuit alleges, it is also a violation of the federal Administrative Procedures Act, which governs the process by which federal agencies develop and issue regulations.

New York, New Jersey and Connecticut were among four states — Maryland being the other — that filed a lawsuit in 2018 challenging the cap itself. The Trump administration has sought to toss that lawsuit.

In the meantime, the four states have also sought to help residents skirt the cap by permitting them to pay much of their state and local taxes to a government-blessed charitable reserve fund and then claim that contribution from their federal tax bill. The final IRS rule, which is set to take effect in August, but will be retroactive to June, effectively prohibits such arrangements.

A separate lawsuit filed by the village of Scarsdale, New York, on behalf of other counties, municipalities and local school districts was also filed Wednesday. That suit argues the IRS regulations will cause “irreparable harm” to the charitable reserve funds established under state law enacted in the wake of the federal tax cut.


Exclusive from our colleagues at the National Council of Nonprofits.

National Council of Nonprofits

Most Legislative Sessions End, Budget Crises Emerge

July 1 marked the beginning of fiscal years for most states, but five states still do not have budgets more than two weeks later, putting government services and nonprofits providing community services at risk. Moody’s Investor Service responded to the budget impasses in the various states by issuing a devastating critique of governance, calling out the five states and warning of late payments to local governments and nonprofits. Moody’s also warned that “downstream entities that rely heavily on state funding may be vulnerable to fiscal stress due to a late state budget, especially if the delay is pronounced or unexpected.” The five states are Massachusetts, New Hampshire, North Carolina, Ohio, and Oregon. Lawmakers in Ohio approved a two-year, $69 billion budget agreement, which included cutting tax rates and brackets, on Wednesday; the Governor is expected to sign it.

State finances in Alaska are experiencing the greatest crisis in that state’s history. The Legislature failed to override more than $440 million in line-item cuts made by the Governor, meaning that funds have been eliminated for, among other programs: Head Start; arts programs; Medicaid dental coverage; student scholarships; and electrical subsidies and ferry services will be curtailed. Overall, this is only a portion of the $1.6 billion budget deficit debate lawmakers are having. Nonprofits have already been forced to significantly cut to or eliminated programs and services. Governor Dunleavy responded that localities must address those concerns, claiming that “[i]t may translate into a new tax at a local level.”

Some in the state, including Governor Dunleavy, have additionally suggested private donors should fill the gaps caused by the spending cuts. However, charitable giving cannot fill this gap as total revenues of all private funding available are only estimated at $80 million, which includes donations from individuals, corporations, and foundations. “It’s a drop in the bucket,” said Laurie Wolf of The Foraker Group, the state association of nonprofits in Alaska. “You can stop funding things, but people don’t disappear, children need to go to preschool so their parents can go to work, we still have seniors, we still have people who experience mental illness, we still have people who experience homelessness,” Wolf said. Going further in an article entitled “Have Courage” she wrote, “There will be harm and unimaginable grief from the lack of an override … but know that the fight is not over.” Learn more about the budget challenges to nonprofits in Alaska by reading Wolf’s testimony before the Legislature last week.