The Simple Reason High-Tax States Are Getting Screwed by the Tax Bill

New-York-New-York-City-Chinatown-Manhattan-Usa-1777986.jpgAs the GOP-led tax bill stumbles its way towards the finish line, a number of House Republicans from New York and a handful of other states have come out against it. There aren’t enough to derail the bill, but the notion of a Republican voting against a tax cut still seems about as likely as a Star Wars fan rating the prequels as the best of the canon.

The reason is simple: the Tax Cuts and Jobs Act is potentially devastating to places like New York, New Jersey and California. By limiting the deductibility of state and local taxes (SALT) and property taxes to $10,000, the bill may actually increase the tax burden on many of these states’ taxpayers. As New York Republican Rep. John Faso put it in announcing his opposition to the final package:

I remain concerned that as a result of the state’s high income and property taxes, the partial elimination of the SALT deduction effective January 1, 2018 impacts New York families more severely than those in other states.  .  . the overall impact of changes to the SALT deduction will accelerate the trend of hardworking individuals and businesses already leaving our state – further eroding New York’s tax base.

It’s easy to think that this treatment of New York and the like is an intentional act of blue-state sabotage by Republicans. In truth, the lower SALT is more likely due to the fact that it raises a lot of revenue, helping to keep the bill under the $1.5 trillion bogey that Republicans had to hit to avoid needing the votes of Senate Democrats. (And if you had to choose between sticking it to middle class voters, or raising the corporate tax rate to 22 percent, well . . . never mind.)

The real reason that high-tax states are being screwed in this bill is much simpler, and it does not bode well for them: They simply don’t have any juice in Congress anymore.

Consider the Senate: In 1986, the last time a major tax reform plan passed, the 10 states* with the (current) highest tax rates were represented collectively by an even proportion of Democrats and Republicans. Today, those ten states send 19 Democrats and only one Republican to the Senate. That’s one of the reasons why, even though Ronald Reagan desperately wanted to eliminate SALT in 1986 (and had a Republican-led Senate), he ultimately gave up on it.

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The House, meanwhile, presents a double whammy for these 10 states. First, those states are represented by a higher proportion of Democrats now than in 1986. In ’86, Democrats controlled the House. They don’t today, meaning that those 10 states’ representation in the House majority party has shrunk significantly.

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Second, those 10 states have lost a net of seven seats due to reapportionment since 1986, giving them even less clout in the House.

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The loss of clout among high-tax states has ramifications far beyond the tax bill. Let’s assume that voters in those states demand their state and local governments lower taxes to offset the increase on the federal side, particularly to help them get below the $10,000 cap. (This would be a tall order: some estimates put the average SALT deduction by California taxpayers at $23,000 and by New Yorkers at $26,000.)

Any reduction in revenue at the state and local level will likely be accompanied by spending cuts, particularly in states with balanced budget requirements. Those states will be forced to look to Washington for extra help. But with shrinking power in D.C., that help won’t come. And, as Rep. Faso warned, there is the possibility that the combo of higher taxes and less spending will lead more people to leave these states, further reducing their representation in the House.

From a purely political perspective, this should concern Democrats and cheer Republicans. But disrupting the longstanding fiscal relationship between states and the federal government that has been the cornerstone of tax policy for more than a century should concern everyone.

And, by the way, the White House should keep this in mind: While nine of the 10 “high-tax” states voted for Hillary Clinton in 2016, number four on the list is Wisconsin, the state that was critical to President Trump’s victory. Badger State voters might have second thoughts next time around if their loss of SALT leads to a tax increase.

*New York, Connecticut, New Jersey, Wisconsin, Illinois, California, Maryland, Minnesota, Rhode Island, Oregon

Photo: Max Pixel

Get Ready for the Great 2018 Tax Mess

files-1614223_960_720That big gust of wind you’re about to hear is a massive exhalation of relief from Republicans that, at long last, they’ve managed to pass a major piece of legislation in 2017.

Notwithstanding Doug Jones’ upset win in Alabama on Tuesday, Congressional Republicans appear to be on track to send to the White House a sweeping tax bill in the coming weeks. But that joy may be short-lived, for 2018 could be a very messy year – for taxpayers, and for them.

It’s worrisome enough for Republicans that their tax plan is massively unpopular. Their bigger problem is that the plan is massively complicated. Even with a carefully thought-out process, major changes to the tax code always lead to unintended consequences and intractable conflicts between provisions that won’t become apparent until CPAs and tax attorneys apply the new laws to their clients’ finances. The tax code is like a humongous Jenga tower: change one incentive or rule, and it impacts scores of others downstream.

And the current bill is hardly the product of thoughful deliberation. Already the bill’s writers have had to confront glaring contradictions and paradoxes as they cobbled together enough votes to pass it.

Once the final bill is signed into law, it will fall on staff at the Treasury Department and IRS to make sense of the new law, educate the public about how to apply new rules and clarify details that Capitol Hill left fuzzy.

And that’s the real problem: Treasury doesn’t seem even remotely ready to handle it.

The current fiscal year 2018 budget plan cuts funding for the IRS, on top of years of cuts that have left its staff depleted. As National Treasury Employees Union President Tony Reardon testified before a House Ways and Means subcommittee this week:

Since FY 2010, overall funding for the IRS has declined by more than $900 million, or 17 percent when adjusted for inflation, while the number of individual taxpayers has increased by 10 million, or more than 6 percent.  These reductions have forced the Service to reduce the total number of full-time, permanent employees by almost 21,000, and resulted in a reduction in the number of employees assigned to answer telephone calls from 9,400 in 2010 to 6,200 in 2015, a 34% drop.

Meanwhile, National Taxpayer Advocate Nina Olson highlighted IRS budget cuts as one of the agency’s major challenges in her 2016 annual report to Congress, stating that “the IRS cannot function well in the 21st century with the budget it has today.”

Reardon also pointed out that during the 1986 tax reform process, Congress actually provided additional funding to IRS to hire more staff.  That’s a far cry from today, when Treasury could only muster a measly  one-page “report” on the bill that would get them kicked out of a high school AP class.

Capital Zoo raised this issue with a moderate Republican House member from the northeast this week. This member, who wants to support the final bill, shared his concern that the administration hasn’t been up to the task so far of explaining or analyzing the bill. But it’s unlikely that pedestrian concerns about competence or capacity will slow down the tax train.

As a result, once the bill passes, expect a hot mess of confusion and controversy about how to interpret and apply the new laws. Remember the disastrous rollout of Health.gov following the enactment of Obamacare? That will look like a walk in the park in comparison.

The larger problem, however, is not the confuision itself, but its consequences. If the new rules go into effect in January 2018, business will need to account for the new law as they plan finances for the year, debate investing in new equipment and make capital investments. How can they make business decisions like these without understanding their true tax implications?

If the tax code is unclear, and Treasury is unable to provide answers, both businesses and individuals could choose to delay spending decisions, which would slow the economy – the precise opposite of what the bill’s backers hope to see. That would make 2018 an extremely bumpy ride for an already unpopular bill – and for those who voted for it.

Tax Reform’s Seismic Shift that Nobody’s Talking About

6757821397_ba181435ea_bNobody disputes that if Congressional Republicans and the White House succeed in dragging their gargantuan tax plan over the finish line, it will reshape massive parts of the economy (and keep accountants in business for years to come).

But its impacts go way beyond the nation’s fiscal state. In fact, this bill may mark a watershed moment in conservatives’ decades-long movement to remove the federal government as a factor in the civic life of the country.

On the chopping block in the House or Senate bills – and in some cases, both – are scores of tax incentives for everything from orphan drugs and medical devices to historic preservation and energy efficiency. Even tax credits for adoption were slated for elimination, until Republicans remembered that humans like adoptions. Other changes, like the increase in the standard deduction, would render many tax incentives effectively useless.

True, some or all of these incentives may find their way back into the final bill. But there’s little doubt Republicans don’t like them. Why? The bill’s supporters maintain that these are “special-interest deductions that increase rates and complicate Americans’ taxes.” And nobody likes a special interest, other than their own.

Besides, Republicans argue that businesses and families won’t miss these deductions and credits since they come along with a hefty tax cut (putting aside for the moment analyses that show the tax cuts aren’t as generous as advertised, unless your last name is Kardashian, Gates, or, well, Trump).

But the real reason conservatives want to gut these incentives is more fundamental:  they are, in their view, nothing more than social engineering run amok. “We’re going to tax the hell out of you,” is how they perceive shifty-eyed bureaucrats thinking, “but if you do things that are socially acceptable (read: politically correct), we’ll kindly let you keep a little more of your hard-earned money.” In their view, only a Democrat would support tax incentives like these (and many do).

But here’s the thing: Republicans used to love tax breaks, and Democrats? Not so much.

In the New Deal and Great Society eras, if you wanted to address a social problem, you created a program that spent taxpayer funds directly: Pell Grants for education, Section 8 for housing, and so on. That all changed when Ronald Reagan declared that government was the problem. Ever since, Republicans have gone to war against direct government spending.

But cutting taxes? That’s far more popular than creating spending programs. And in the conservative world, a dollar refunded to the taxpayer stimulates the economy far more than a dollar spent by Uncle Sam.

Progressives, meanwhile, would much prefer direct spending on government programs. For one thing, tax incentives tend to skew towards the wealthy. The Center on Budget and Policy Priorities notes that more than half of the money from these tax expenditures goes to the top 20 percent income-earners – and nearly one out of every six dollars out the door goes to the one-percenters. Second, running social programs through the tax code provides far less oversight and fewer guarantees the funding goes to its intended recipients.

For the last two decades, however, Democrats have learned to love tax incentives (or at least dislike them less), since creating new spending programs has become politically impossible. When Bill Clinton announced in 1995 that the “era of big government is over,” conservatives may as well have strung a Mission Accomplished banner across the Capitol.

The fact is, tax breaks represent big government just as much as direct spending – even more. In 2015, tax expenditures drained the federal coffers of more than $1.2 trillion, more than spending on all defense and non-defense programs combined. That’s why they’re called, in DC-speak, tax expenditures. You’re still spending taxpayer money, but in a far more opaque way.

As a result, the IRS has a bigger role over government policy than most other agencies do. The federal government “spent” more than $7 billion for energy-related tax incentives in 2017, as much as half of the Energy Department’s entire non-nuclear budget. And while the tax experts at the IRS are pretty smart, they aren’t experts in energy – or in R&D, or adoption, or medical devices, or the countless other items that qualify for tax breaks.

Tax expenditures are a lousy way of making policy.  But in the “government-is-bad” era, they’re the only way for Washington to achieve social policy goals.

That’s why the current tax plan portends an ominous future for those who support a federal role in domestic affairs. Having made direct spending politically unfeasible, conservatives are now furiously working to make tax incentives equally obsolete. Once they’re gone, conservatives will be one step closer making the federal government so small they can, in the words of ant-tax crusader Grover Norquist, drown it in a bathtub.

At the end of the day, the Frankenstein monster that is the current tax bill may fall short of conservatives’ goal of eliminating tax expenditures completely. But their efforts will likely continue. The federal government hasn’t been drowned in the bathtub quite yet. But the water level is getting awfully high.

Photo: 401calculator.org