December 11, 2017
Dear[Senator and/or Representative]:
I [we]am [are] writing to relay the serious concernsregarding Section 5001 of the House-passed Tax Cuts and Jobs Act (H.R. 1). While not in the Senate bill, this House provision would, for the first time, subject certain investments of state and local governments’ retirement systems to the unrelated business income tax (UBIT). We strongly urge you to please ensure this provision is excluded from the final conference agreement.
UBIT represents a new tax on public pension plan earnings, which would be nearly double the new corporate rate under tax reform, and is not a clarification or updating of existing law.It overturns a 40-year-old position by the Internal Revenue Service to not apply UBIT to governmental plans – a precedent on which governmental plans have relied in good faith.Application of UBIT to state and local retirement systems also erodes the Constitutional immunity states and the federal government each enjoy from taxation by the other.
This new tax would also have deleterious effects on public plan portfolio construction and diversification, both increasing risk and lowering returns. Furthermore, it is scheduled to go into effect for tax years beginning January 1, 2018, which would impact existing investments that cannot be restructured.
Since the Great Recession, every state has made difficult changes to one or more of its pension plans to strengthen their financial condition, without the expectation of Congressional assistance. What has been expected, however,is that federal lawmakers will avoid imposing adverse proposals that make it more difficult for state and local governments and their employees to finance retirement benefits, particularly without any formal consideration of the impact on these programs or the resulting disruption to certain investments(including economic development, real estate, and infrastructure).
Investment earnings pay for approximately two-thirds of public pension benefits. Federal taxation of these earnings will increase both cost and volatility, thereby impairing the fiscal health of both the plans and their sponsors, and ultimatelyincreasingcosts to taxpayers.
We hope we can count on your assistance in ensuring this provision is not included in the final conference report. We thank you very much for your attention to this important matter.