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Tax reform bill could cost Buffalo schools $12.2 million, cut Medicare

WASHINGTON — Tax reform could cost Buffalo city schools $12.2 million.

It also could radically raise the cost of construction for improvements at the region's colleges, in Buffalo's public housing, and elsewhere throughout the region.

And it could force the federal government to make unprecedented cuts in Medicare, border security and a host of other programs.

Such are some of the largely unnoticed consequences of the $1.5 trillion tax cut plan the House passed last week.

As House Republicans scrounged for revenue to pay for tax cuts for corporations and individuals, they crafted a bill that would take away tax breaks that schools and municipalities have long enjoyed. And even so, the House still fell so short of funds that its plan could result in huge automatic federal budget cuts next year.

Adding it all up, local leaders such as Mark J.F. Schroeder, Buffalo's city comptroller, are deeply worried.

"This tax reform package is devastating to Buffalo and to other entities in Buffalo," Schroeder said.

The tax bill won't become law unless the Senate acts and the two houses of Congress negotiate a compromise. Republicans acknowledge the bill could cause problems for municipalities in particular, and fixes can be made when a House-Senate conference committee crafts a final tax reform package, according to Rep. Tom Reed, a Corning Republican who sits on the tax-writing Ways and Means Committee.

"All of these detailed issues that are coming up, and the differences between the House and the Senate bill can be ironed out in a way that's positive for all involved," Reed said.

But Rep. Brian Higgins, a Buffalo Democrat who also serves on the Ways and Means panel, thinks Republicans may feel compelled to keep all those changes in place to fund their plan to cut the corporate tax rate from 35 percent to 20 percent.

"These were not unintended consequences," Higgins said. "They were very deliberate and aimed toward the goal of finding more money to provide a huge tax cut to corporations."

School repairs to cost more

Buffalo city and school officials came to realize the tax bill's hidden costs when Citigroup, which issues bonds on behalf of the city, prepared a report spelling out the plan's ramifications.

One figure — $12.2 million — stood out. That's the amount that Buffalo City Schools would have to shell out in the coming years under the House tax bill, according to the report.

That's because the tax reform legislation would prevent the city from refinancing school repair and construction debt at a lower rate.

"If the tax legislation doesn't pass, in the next six to nine months, the city would refinance those bonds and likely save at least $12 million," said Geoffrey Pritchard, chief financial officer for Buffalo City Schools. "If this tax legislation passes, we're not going to have that opportunity."

Both the House and Senate versions of tax reform would repeal the tax-exempt status of "advance refunding bonds," which municipalities routinely use to refinance debt when it's cheaper for them to do so.

Like many cities, Buffalo for years took on debt to finance millions of dollars of repairs and other school improvements. But Schroeder said that since he became controller six years ago, the city hasn't had to take on such new debt, just because the law allowed the city to refinance and save money.

That seems about to change, and as a result, Pritchard said, the city may have to take on new debt or go without some school repairs.

"We may have to issue bonds, delay some things," Pritchard said.

Issuing those new bonds could be more expensive under the House bill. The Citigroup report noted that Buffalo has the authority to issue $67 million in low-tax school construction bonds — but the House bill would take away that authority at the end of the year.

Other projects to cost more

The House tax bill also would make new construction projects cost more at the Buffalo Municipal Housing Authority, the Buffalo Niagara International Airport, Catholic Health, the University at Buffalo and Canisius College, the Citigroup report said.

That's because the House bill, unlike its Senate counterpart, would terminate "private activity bonds." Those are tax-exempt bonds that governments issue for improvements at private institutions or public authorities.

The South Buffalo Charter School — one of the region's first — came about through that sort of bond financing, Schroeder noted.

Countless other  projects throughout the region may not get built if Congress shuts off a cheap way to finance them, according to several sources, including John J. Hurley, president of Canisius College.

"The elimination of private activity bonds will harm our ability to support our mission and continued financial health by eliminating a critical resource that supports our infrastructure, including academic buildings, residence halls and more," Hurley said in a letter to Higgins.

Why would the House try to strip away the tax-exempt status of bonds meant to rebuild infrastructure all around the country?

To hear the National Conference of Mayors tell it, Congress wants to start taxing that sort of bond financing to add money to the federal treasury.

"This is a bold example of reaping federal revenue at the expense of local government," said John Giles, the mayor of Mesa, Ariz., and a trustee of the mayors group.

Reed, a former mayor of Corning, said many members of Congress understand that making borrowing more expensive could hurt municipalities. That means the tax provisions regarding such borrowing could well be changed before the bill is finalized.

"In the Senate, I think there's a path for us to address this issue as well as some of the other issues," Reed said.

Medicare cuts?

The tax bill could turn out to be very taxing for seniors, too.

That's because it could lead to upward of $25 billion in cuts to Medicare as soon as next year, the nonpartisan Congressional Budget Office reported last week.

Those cuts could be part of a series of spending reductions prompted by the fact that the tax bill is projected to increase the federal deficit. If it does, that could trigger automatic budget reductions totaling $136 billion under a federal "Pay As You Go" rule.

The budget office's report triggered panic among supporters of Medicare, who fear the tax bill could end up forcing seniors to pay more for less coverage.

"Obviously, such a drastic cut would undermine the delivery of care to the 57 million seniors and disabled Americans who depend on the program," said Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare.

Medicare recipients wouldn't suffer alone. The automatic spending reductions would cut across the federal government, shrinking everything from customs funding at the nation's borders to farm subsidies. Some farm support programs could be wiped out entirely, said Roger Johnson, president of the National Farmers Union.

"Tax cuts for the highest income brackets should absolutely not come at the expense of programs that protect our nation's family farmers and ranchers," he said.

Reed said he isn't concerned about the prospect of automatic budget cuts.  Congress would likely act to prevent the worst cuts and tweak others, he said. Besides, the economic growth the tax bill would spark would increase government revenues and minimize the possibility of growing deficits, he said.

Revival of the Ryan plan

When asked whether Medicare was safe from budget cuts, Reed said: "I would say that Medicare is on a path to insolvency, so to declare Medicare safe is not an accurate statement. Medicare is in need of reform in order to save it for the people that rely upon it."

In other words, the tax bill could revive House Speaker Paul Ryan's proposal to convert Medicare in part to a voucher-based system that would encourage seniors to shop for their health care plans. Ryan, a Wisconsin Republican, long has said doing that would save money and stabilize Medicare, which, auditors say, could otherwise run short of funds by 2029.

The revival of Ryan's plan worries Higgins.

"You know what's going to happen," he said. "When the deficit goes up, all the people who voted for this fraudulent piece of legislation are going to start saying: 'Oh, we've got to cut entitlements. The deficit is so high.' "

Arguments such as that didn't really come up in the two weeks between the House tax bill's introduction and its passage. Higgins said Republicans rushed the bill through the House so that some of the details would go unnoticed.

And Schroeder said it would have been far better if the House had taken the time to learn about the bill's consequences on municipalities and individuals.

"That's the way government should work," Schroeder said. "It doesn't work that way in Washington, D.C."

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