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Published: Sun, 21 Jan 2018 00:00:00 -0500

Last Build Date: Sun, 21 Jan 2018 12:56:31 -0500


Is Tax Reform Already Working?

Fri, 19 Jan 2018 11:30:00 -0500

To read the press releases, you might think the GOP's new tax reform law is already a smash success. The legislation, which permanently slashed corporate tax rates from 35 percent down to 21 percent, was only signed into law last month. But more than 100 companies have already indicated that they will make big moves to benefit workers and the economy—including raising wages, handing out bonuses, granting 401(k) increases, and committing to increased capital investment—while citing the law's reduction in the corporate income tax rate as at least part of the reason. American for Tax Reform published an impressive list of the companies who have made such announcements so far, with quotes linking their action to the tax bill. Walmart increased its base wage for all hourly employees from $10 to $11 and granted $1,000 bonuses. Aflac Insurance is extending parental leave, increasing its 401(k) match from 50 percent to 100 percent on the first 4 percent of compensation, and making one-time $500 contributions to every employee's 401(k). That amounts to a $250 million increase in overall U.S. investment. But it's not clear how many of these moves would have happened anyway, even if tax reform had never passed. The recent burst of activity isn't at all in line with the standard economic theory of how reductions in marginal federal business tax rates affect workers' compensation. Economists usually argue that lowering marginal tax rates on investment gives companies an incentive to earn more taxable income leading them to invest in other businesses and the expansion of their factories. This in turn raises workers' productivity, and ultimately leads to higher wages. In other words, it takes time for companies to invest new capital, and reap the benefits of their investment. This is clearly not what happened here, however, since many of the bonuses were announced after the House and the Senate passed the tax bill but before the president even signed it. So what's really going on? I asked tax expert Scott Greenberg at the Tax Foundation how he explains the discrepancy. He said that "an alternate theory may be needed to explain the recent bonuses and pay increases." According to him, "One such theory, which has been suggested by Kevin Hassett, is that workers may have some ability to bargain for a share of the windfall from a business tax cut." He isn't sure how to evaluate yet whether that theory is correct, but he acknowledges that "it is true that some of the companies providing bonuses and wage increases have done so after demands by labor unions." Greenberg also offered another, more cynical theory. "Companies may have been planning on raising labor compensation anyway, due to increasingly tight labor market, and chose to attribute bonuses and wage increases to the tax bill, as part of an effort to build public goodwill for the legislation." With Moody's estimating that the unemployment rate will drop to 3.5 percent by the end of the year, the raises probably indicate a tighter labor market, and employers taking steps to retain their employees. If this theory is correct, it is a brilliant public relations move from companies who for years have been labeled greedy bastards who always keep all their profits and will keep the benefits from the tax cuts all to themselves while leaving their employees out to dry. But it's not exactly a sign that the tax law is an instant hit. Now, this could play out in multiple ways. On one hand, based on the commitment made by many companies on the ATR list to increase their capital expenses significantly in 2018, more wage increases could be coming as the standard theory predicts. It will take some time to materialize, but it will happen. On the other hand, the narrative that the bonus frenzy is a direct result of successful tax reform legislation could backfire. For one thing, Americans and employees may incorrectly expect for it to happen year after year. And while tax reform will indeed grow wages over time, it will never be as visible and marketable as the rollout of these announcements at th[...]

Trump Turns One

Thu, 18 Jan 2018 09:30:00 -0500

The 45th president does not tend to elicit measured evaluations. Since even before his formal entry into national politics in 2015, Trump has acted as a powerful magnet on the body politic—attracting and repelling onlookers with equal force. A year ago, as we prepared to see a former reality television star sworn into the highest office on Earth, predictions abounded regarding the effects he was about to have on the country and the world. On one side were confident assertions that he would repeal the Affordable Care Act, bring back manufacturing jobs, and end political correctness once and for all. On the other were fears that he was a racist and a dimwit who would certainly abuse the powers of his station and might well start a nuclear war. On the Trump presidency's first birthday, the reality is less extreme than either set of prognosticators envisioned. The Republican Party under his leadership managed one major legislative accomplishment—tax reform that cut the corporate rate and is projected to add nearly $1.5 trillion to the debt—and failed after months of wrangling to enact an Obamacare replacement. Tensions with foreign governments from Iran to Russia to North Korea continue to simmer. The stock market has followed a dramatic upward trajectory, yet anger continues to grow over perceived wealth and income inequality. With the midterm elections now 10 months away, political polarization seems to hit new highs daily, but in many ways the checks and balances of our federalist system are working to keep even the current unscrupulous White House occupant from actualizing his most ambitious plans. As the 365-day mark approaches, have we reached a milestone worth celebrating or taken just another step in our national descent to unthinkable places? Reason asked 11 experts to weigh in on Trump's record so far. From positive signs on transportation policy and regulatory rollback to a worrying rise in nationalist sentiments and redoubled efforts to cleanse the United States of undocumented immigrants, the answers were a mixed bag, highlighting just how much uncertainty awaits the country in the year to come. —Stephanie Slade TAXES AND HEALTH CARE: Victory, Sort of, Maybe Peter Suderman At the beginning of 2017, Speaker of the House Paul Ryan told GOP lawmakers that the new Congress would repeal Obamacare and pass deficit-neutral tax reform by August. At summer's end, Republicans, despite holding majorities in both chambers, had accomplished neither. But eventually they would accomplish parts of each. In March, the House was set to hold a vote on legislation that would have repealed much of the Affordable Care Act while setting up a new system of related federal tax credits. Ryan was initially forced to pull the bill from the floor due to lack of support, but after making a series of tweaks intended to provide states with more flexibility, the body passed a health care bill in May. GOP leaders congratulated themselves for making progress on the issue, but the plaudits were premature. The bill stalled out in the Senate. By September, the Obamacare repeal effort was dead and Republicans had moved on to more comfortable territory: rewriting the tax code. At the center of the new effort was a significant cut to America's corporate tax rate, which at 35 percent was the highest in the developed world. Donald Trump had campaigned on slashing it to 15 percent. The GOP aimed for 20. At first, the tax effort went much like the health care effort. There were disagreements between the House, which hoped to partially offset any revenue losses with spending cuts, and the Senate, which gave itself permission to increase the deficit by $1.5 trillion. Republican senators also disagreed among themselves: Jeff Flake (R–Ariz.) and Bob Corker (R–Tenn.) worried about sinking the country further into the red, for instance, while Marco Rubio (R–Fla.) and Mike Lee (R–Utah) wanted a potentially pricey increase in the child tax credit. Moderates like Sen. Susan Collins (R–Maine) meanwhile reserved judgment[...]

Who Knew Letting People Keep More of Their Money Leads to Good Things?

Tue, 16 Jan 2018 12:31:00 -0500

In the six weeks since the passage of the tax law, dozens of companies have announced bonuses and wage hikes, some of them just hours after the bill was passed. Although the bill has not yet gone into effect, there been other tangible benefits to a lower tax burden—some gas and electric companies, for example, have decided to pass on their tax savings via lower rates for customers. None of this should've been unexpected. Nearly 140 economists, urging Congress in November to pass the tax reform bill, predicted more jobs, higher wages, and a better standard of living for Americans, largely because of a lower corporate tax rate, which they explained would spur investment, business formation, and productivity. Shikha Dalmia wrote positively about the tax bill back in April. She predicted it would spur the kind of growth we're starting to see signs of, and also noted that that growth could have the effect of undercutting Trump's ethno-nationalist agenda. There's also evidence that historically lower tax rates in the U.S. overall lead to higher economic growth. Perhaps Peter Suderman put it best: the tax bill was in no way perfect, but not the end of the world its critics predicted. Instead, it was a "predictable, conventional piece of Republican tax legislation," with predictable drawbacks (primarily a deficit increase) and benefits, some of which are starting to be seen. Before the new law, the U.S. had one of the highest corporate tax rates in the world, leading many companies to move some operations overseas to lower their burden. Studies suggested the rate was so high it was actually reducing productivity so much as to lead to decreased revenue. In the run-up to last month's vote on the Republican tax bill, critics poo-pooed the intuitive idea that if companies pay less in taxes, some of that will make its way back to workers. Democrats in Congress were even worse, deploying apocalyptic rhetoric about the bill. The Center for American Progress' Igor Volsky, meanwhile, sounded downright ecstatic that Walmart announced layoffs. Paul Ryan in December: "majority of businesses are going to do just what we say, reinvest in their workers, reinvest in their factories, pay people more money, higher wages." TODAY, WALMART --THE LARGEST PRIVATE EMPLOYER -- ANNOUNCED IT WAS LAYING OFF THOUSANDS OF WORKERS. — igorvolsky (@igorvolsky) January 11, 2018 Volsky's characterization of what happened is misleading. Walmart is reportedly closing dozens of its underperforming Sam's Club locations after years of expansions. Walmart, meanwhile, announced it was raising its starting wage to $11 an hour, handing out bonuses to eligible employees, and looking for other ways to re-invest their tax savings. For his part, Ryan's prediction was about what a "majority of companies" would do, as Volsky himself described it, not every single one. A lower tax burden makes it easier to do business but it's hardly a cure-all. Most advocates avoided that kind of exaggeration. Companies' decisions to give employees bonuses or raise wages are headline-grabbers, and in the coming months and years there ought to be evidence other good things happening, too. And all because individuals the companies who employs them can keep more of their own money.[...]

Legal Weed Could Create $50+ Billion in Federal Tax Revenue

Fri, 12 Jan 2018 10:15:00 -0500

(image) There's big money in legal weed, and the federal government's cut could be more than $5 billion a year from sales tax revenue alone.

So says a new study by New Frontier Data, a marijuana market research firm, which assumed a 15 percent retail sales tax. Add payroll tax deductions and business tax revenue from new jobs and enterprises, and the study says new revenue will total more than $138 billion. (That estimate is based on a 35 percent corporate tax rate, and the new tax law lowered the rate to 21 percent. No biggie.)

The study also estimated that if the federal government legalized pot, the marijuana industry could create more than a million new jobs over the next eight years.

Whether or not the numbers are exactly right, the study's broad conclusions are intuitive. It should be obvious that bringing a portion of the drug trade out of the black market will create new legal jobs and new tax revenue. (The study suggests that 25 percent of the pot trade could remain in the black market even with full legalization, although lower taxes could reduce that.)

The economic arguments for legalization are not new, but the mainstream is finally catching on. Vermont is set to become the ninth state to legalize recreational marijuana, and the first to do so via the state legislature.

In 2012, Colorado and Washington became the first states to fully legalize marijuana, via ballot initiatives. At the same time, for the first time since Gallup polled the question in 1969, a majority of Americans—58 percent—favored legalization. Today the number is 64 percent. In 1969, it was just 12 percent. The Trump administration, unfortunately, is moving in the other direction.

'Economists Say' a Lot of Things. Many of Them Are Wrong

Fri, 05 Jan 2018 00:30:00 -0500

"A wave of optimism has swept over American business leaders, and it is beginning to translate into the sort of investment in new plants, equipment and factory upgrades that bolsters economic growth, spurs job creation—and may finally raise wages significantly," opens a recent New York Times article surveying the state of the American economy. One imagines that readers of the esteemed paper were surprised to run across such a rosy assessment after having been bombarded with news of a homicidal Republican tax plan for so many weeks. But not to worry! Over the next few thousand words, the authors do their best to assure readers that neither deregulation nor tax cuts are really behind this new economic activity—even if business leaders keep telling them otherwise. For example, they claim that "There is little historical evidence tying regulation levels to growth." A few paragraphs later, we again learn that "The evidence is weak that regulation actually reduces economic activity or that deregulation stimulates it." A reporter without an agenda might have written that evidence was "arguable," because I bet I could corral a bunch of economists to tell you that lowering the cost of doing business spurs economic activity quite often. And though the Trump administration somewhat overstates its regulatory cutbacks, it has stopped hundreds of Obama-era regulations from being enacted. Even better, it has stopped thousands of yet-to-be-invented regulations from ever being considered. There's plenty of evidence, in the article and elsewhere, that this kind of deregulation has plenty to do with investment and job growth. There is also plenty of evidence that econ reporters at major publications have spent the past decade propping up economists who tell them what they want to hear. That is to say, they prop up economists who obsess over "inequality" rather than economic growth, who worry about the future of labor unions or climate change or whatever policy liberals happen to be plying at the moment. There are plenty of economists out there making good arguments for the free market who will never be member of the "economists say" clique. For eight years, we consistently heard about how "economists say" everything Democrats were doing was great (even when hundreds disagreed). Unsurprisingly, "economists" were wrong about a lot. The rosy predictions set by President Obama's Council of Economic Advisers regarding the "stimulus," the administration's prediction of 4.6 percent growth by 2012 and the Congressional Budget Office predictions about Obamacare were all way off base. There are thousands of unknowns that can't be quantified or computed, including human nature. But after decades of using data to help us think about goods, services, jobs, consumption and our choices, "economists say" is now used to coat liberal policy positions with a veneer of scientific certitude. And since Democrats began successfully aligning economics with social engineering, we've stopped seriously talking about the tradeoffs of regulations. A good example of this trend is the push for a $15 minimum wage—an emotionally satisfying, popular and destructive policy idea. Most cities that have passed the hike have experienced job losses. When researchers at the University of Washington studied Seattle's $15 minimum-wage hike, one of the largest in the nation, they found that thousands of fewer jobs were created and thousands of people lost hours of work, making them poorer. No doubt a lot of people were surprised. Vox, a leading light in the liberalism-masquerading-as-science genre, ran an article headlined "The Controversial Study Showing High Minimum Wages Kill Jobs, Explained." You might wonder why incessantly quoted studies from liberal "nonpartisan" groups that falsely predicted minimum wages wouldn't hurt cities aren't "controversial." Because if you want to raise the minimum wage, you will raise the price of labor and often reduce the amount of l[...]

California Is Taxing the Hell Out of Pot, but Washington Is Even Greedier

Thu, 04 Jan 2018 09:15:00 -0500

Marijuana merchants in California, who began legally serving recreational customers on Monday, complain that they are overtaxed, and they have a point. Of the eight states that have legalized marijuana for nonmedical use, California has the second highest total taxes, beaten only by Washington, where legal recreational sales began in 2014. Alaska, where state-licensed pot shops first opened for business in 2016, has the lowest taxes (although not the lowest prices). Here is a state-by-state breakdown of recreational marijuana taxes, from lowest to highest. To estimate the impact of taxes imposed at the wholesale level, I use a typical pretax retail price for an eighth of an ounce, as advertised by dispensaries in each state. ALASKA Recreational sales began: October 1, 2016 Relevant taxes: $50 per ounce on sales by growers, plus local sales taxes ranging from zero in Anchorage to 7.5 percent in Homer Upshot: The wholesale tax adds $6.25 to the price of an eighth. Based on a pretax retail price of $60 (legal marijuana is expensive in Alaska), the 5 percent sales tax in Juneau would make the final price $63 and the total effective tax rate about 17 percent. In Anchorage, which has no sales tax, the rate would be 12 percent. OREGON Recreational sales began: October 1, 2015 Relevant taxes: 17 percent state marijuana tax collected by retailers, plus local marijuana taxes (up to 3 percent); no general sales tax Upshot: Marijuana taxes in cities such as Portland, Eugene, and Salem total 20 percent. MASSACHUSETTS Recreational sales begin: mid-2018 Relevant taxes: 10.75 percent excise tax collected by retailers, along with the 6.25 percent state sales tax and a local marijuana tax of up to 3 percent Upshot: As in Oregon, taxes in major cities probably will total 20 percent. NEVADA Recreational sales began: July 1, 2017 Relevant taxes: 15 percent tax on sales by growers, 10 percent retail excise tax, 4.6 percent state sales tax, and local sales tax Upshot: Based on a wholesale marijuana price of $2,300 per pound of buds, the first tax adds $2.70 to the cost of an eighth. Assuming a pretax retail price of $60, the final price would be $70.95 in Las Vegas, where the local sales tax is 3.65 percent. The total effective tax rate would be 24 percent. MAINE Recreational sales begin: unknown Relevant taxes: 20 percent state tax on retail marijuana sales (proposed), plus 5.5 percent general state sales tax Upshot: Assuming the proposed tax is enacted, the total tax rate will be 25.5 percent. COLORADO Recreational sales began: January 1, 2014 Relevant taxes: 15 percent excise tax on sales by growers, 15 percent marijuana sales tax, local marijuana taxes, and local sales taxes; recreational marijuana has been exempt from the general state sales tax since July Upshot: Based on a wholesale marijuana price of $1,300 per pound, the excise tax adds $1.52 to the cost of an eighth. Assuming a pretax retail price of $30, the final price would be $36.65 in Denver, where the local marijuana tax is 3.5 percent and the local sales tax is 3.65 percent. The total effective tax rate would be 29 percent. CALIFORNIA Recreational sales began: January 1, 2018 Relevant taxes: $9.25 per ounce sold by growers, 15 percent excise tax collected by retailers, local marijuana taxes, 6 percent state sales tax, and local sales taxes Upshot: The wholesale tax adds $1.16 to the cost of an eighth. Based on a pretax retail price of $50, the final price would be $67.10 in Oakland, where the local marijuana tax is 10 percent and the local sales tax is 3.25 percent. The total effective tax rate would be 37 percent. WASHINGTON Recreational sales began: July 1, 2014 Relevant taxes: 37 percent state excise tax collected by retailers, 6.5 percent state sales tax, and local sales tax Upshot: In Seattle, where the local sales tax is 3.6 percent, the total tax rate is 47.1 percent. High marijuana taxes make it harder for state-licensed merchants to [...]

Prepaid Property Tax Perplexity Highlights the Tax Code's Confounding Complexity

Fri, 29 Dec 2017 13:50:00 -0500

Although the tax bill that Congress enacted last week was sold as a simplification measure, it created a bunch of new wrinkles for Americans trying to figure out how much they owe the federal government and why. This week's confusion over prepayment of property taxes shows how even a step in the right direction—in this case, limiting a deduction that favors the wealthiest taxpayers in the most expensive parts of the country—can make the tax code even more complicated. The tax bill imposed a $10,000 limit on the deduction for state and local taxes (SALT), effective this Monday. The change does not affect most Americans, because most Americans do not pay more than $10,000 in state income taxes, local property taxes, or the two combined. The change does not affect my family, for example, because we live in Texas, which has no income tax, and rent our home, so we have no property taxes to deduct. It would be a different story if we still lived in Virginia, which has an income tax, and still owned a house in Fairfax County, where the median property tax bill is about $5,000. When you add state income tax, a middle-class family can easily pay more than $10,000 total. In parts of the country with higher home prices and/or higher property tax rates, such as New York City and Los Angeles, the SALT deduction is worth even more. And the bigger and more expensive your house, the more you can expect to save on your federal income taxes (especially when you take into account the deduction for mortgage interest, which the tax bill also limits). The new SALT ceiling therefore makes the tax code less favorable to rich people with mansions (as well as politicians who overtax their constituents). But it also introduces new complications, especially during the transition period. This week homeowners in places such as Fairfax County, Chicago, Washington, D.C., and Hempstead, Long Island, lined up to prepay their 2018 property taxes before the new limit takes effect. New York Gov. Andrew Cuomo and New Jersey Gov. Chris Christie, who see the SALT limit as an affront to residents of expensive, high-tax states like theirs, encouraged advance payments, while officials in Connecticut said they do not have the legal authority to accept them. The tax office in Simsbury warned that prepayment "could be considered an effort to evade federal income tax liability." Compounding the confusion, the IRS on Wednesday issued an advisory saying prepayments are deductible only if the property tax was officially assessed before the end of this year. The tax bill specifically precludes deductions under the old rules for prepaid state taxes on 2018 income, but it does not address prepaid property taxes. The IRS did not explain the legal rationale for distinguishing between payments and assessments, which is bound to be the subject of litigation. The upshot is that people who have shelled out thousands of dollars in lump-sum property tax payments may get no benefit from paying early and may not know for sure whether their deductions are valid for months or years. "It's fun if you're a tax lawyer," David Herzig, a professor of tax law at Valparaiso University, told The New York Times. "I'm not sure it's fun if you're a person going through it." Beyond the economic distortion caused by the tax code's myriad deductions, credits, and exemptions, there is something fundamentally wrong with a system of revenue collection that can be navigated only with the help of experts—and in many cases (like this one) not even then. When it comes to figuring out what the tax code requires, the experts may disagree. People are expected to comply with the law but have no way of determining what that means.[...]

Democratic Rhetoric on GOP Tax Law Is Just Silly

Fri, 29 Dec 2017 00:01:00 -0500

An acquaintance who owns a large California business likes to talk about the negligible impact of the tax code on his personal life. As he puts it, well-off folks can afford the homes, cars and vacations they enjoy. Their lifestyle is static. When the government taxes them at a higher rate, that simply means they have less money to expand their business. It won't force them to subsist on macaroni and cheese, sell the Tesla or feel any personal discomfort. That's a key point to consider when you listen to the rhetoric from Democratic leaders about the supposed evils of the recently passed Republican tax plan. The left wants to punish the rich, but defending higher taxes mainly punishes everyone else. House Minority Leader Nancy Pelosi referred to the bill as a "rip-off, this plundering, this pillaging of the middle class." Sen. Bernie Sanders (I-Vt.), whose leftist rhetoric almost gained him the Democratic presidential nomination, said: "Today marks a great victory for the Koch brothers and other billionaire Republican campaign contributors who will see huge tax breaks for themselves while driving up the deficit by almost $1.5 trillion." Sanders' words were particularly foul by suggesting that these donors—people who fund myriad libertarian causes, including some such as criminal-justice reform that should appeal to liberals—are trying to stuff more dollars in their pockets. But Sanders probably is right that the tax plan will add to the nation's appalling deficit. That's an apparent flaw in a Republican tax bill that lowers tax rates in an attempt to jump-start economic growth, but Democrats (through the Byrd Rule) have made it virtually impossible to cut spending. Better half a loaf than nothing. And how can Democrats seriously complain about deficit spending? Their political platform is all about spending more government money. Massachusetts Sen. Elizabeth Warren even compared the bill to robbery, yet all such spending is taken from current taxpayers—or from future ones in the form of the growing national debt. That said, many observers—even conservative ones—don't believe that the bill's myriad breaks will pay for themselves. "Most Republicans say that the tax cut will generate so much extra growth that it will increase revenues," opined the editors of the conservative National Review. "No economic model of the tax cut, not even any of the models produced by conservative economists, backs this claim." It lets Republicans, however, "offer tax cuts to various constituencies without having to impose any restraint on spending." The last sentence sums up my problem with every tax bill I've written about in my adult life. Despite Republican rhetoric about cutting government, no one ever cuts government spending. Indeed, the Trump administration wants to invest in military and national-security programs, build a border wall (that Mexico is definitely not going to pay for), and even push NASA to send astronauts back to the moon. Those things aren't free, either. Nevertheless, many of us object to the Democratic concept that cutting taxes for individuals and businesses is the same as "spending" more money, as writer David French pointed out. That's only true if the government has a claim to our entire paycheck. A lot of attention has focused on the political ramifications of the bill. Indeed, the plan was the first major legislative victory for the president—one he desperately needed. But that's neither here nor there in terms of policy. (As an aside, if Donald Trump spent more time on such substantive matters and less time tweeting nonsense, perhaps Republicans would have a better chance of passing other substantive measures.) What matters is whether the bill's provisions are good ones. Mostly they are. It does some constructive things. For instance, most Americans—not just the wealthy, despite Democratic claims to the cont[...]

Another Winner From Tax Reform: State Governments

Tue, 26 Dec 2017 14:30:00 -0500

During a dinner in December 1974 at the Washington Hotel, so the story goes, Authur Laffer sketched a curved line on a cocktail napkin to demonstrate to Donald Rumsfeld how cutting tax rates could actually increase tax revenue. The basic idea imparted to Rumsfeld, chief of staff for then-President Gerald Ford, (and other Republicans attending dinner that night) would serve as the basis for nearly every GOP-backed tax proposal since—including the Tax Cuts And Jobs Act, signed into law by President Donald Trump on Friday. The so-called "Laffer Curve" makes a solid, important argument for reducing tax rates and letting Americans keep more of their own money. As a practical matter, it lets Republican lawmakers have their cake and eat it, too, by promising economic growth, fatter worker paychecks and more government revenue. It doesn't always work out. No matter how much Republicans wish for the Economic Growth Fairy, not a single analysis of the Tax Cuts And Jobs Act projects that economic growth will cancel out the $1.5 trillion in tax cuts included in the bill. The impact at state capitols, though, could be quite different. In all, states figure to be one of the big winners from federal tax reform—they stand to collect a windfall of cash without having to make any change in their own policies. Some state policymakers are already figuring out what to do with that bounty. In some places, that will be an added dose of good news for taxpayers. The passage of federal tax reform could mean an increase of between $150 million and $200 million annually in state revenue in Oregon, state economist Mark McMullen told the Oregon Senate Committee on Revenue and Finance earlier this month. And they are in line with what is being seen in other states. "These are big numbers, and catching our attention," McMullen said. "In the past, when we've seen big federal changes to tax law—in the Reagan era and the Bush tax cuts—both of those turned into real significant boosts in terms of Oregon's own source of revenue." The same is true in Maryland, where Gov. Larry Hogan's administration expects state tax revenues to increase by "hundreds of millions of dollars a year," according to The Baltimore Sun. The relationship between federal taxes and state tax revenue can't quite be reproduced on the back of a cocktail napkin, but the correlation is a strong one. Taxpayers in 36 states begin their state returns with their federal gross or taxable income, says Joseph Bishop-Henchman, vice president of the Tax Foundation, a tax policy think tank based in Washington, D.C. Nine states have no income tax, leaving just a handful of states with no direct connection to the federal tax code. The changes wrought by the federal tax bill generally broaden the income tax base by eliminating or reducing deductions for individuals and businesses. Eliminating those exemptions and deductions at the federal level will increase taxable income amounts. Unless states follow suit by reducing their tax rates, the result will be a larger level of taxable income for state-level taxpayers, McMullen says. An expanded corporate tax base and one-time repatriation (under the federal tax reform, corporations can pay a one-time tax to bring $2.6 trillion in overseas assets) will also boost state tax revenues as those assets suddenly reappear on businesses' tax returns. "States will receive a windfall from this, although it will be uneven based on where international companies have state tax liability," Henchman says. Doubling the standard deduction will also impact states. Twelve states conform with the federal standard deduction, and will see lower revenue as a consequence and 10 states have a personal exemption eliminated entirely in the federal tax bill, so is a net wash for the most part, says Henchman. And what about the much-discussed reduction of the stat[...]

Tax Reform Was Easy, Spending Cuts Are Un-possible

Fri, 22 Dec 2017 15:30:00 -0500

With the stroke of President Trump's pen, long-promised tax reform is now the law of land. With it comes more than a few excellent developments—a major, overdue reduction in the corporate rates, a shift to a territorial system of collection, caps on tax expenditures such as deductions for state and local taxes and mortgage interest, the end of the individual mandate for Obamacare—and a whole new set of concerns, none more pressing that a certain reduction in revenue even as government spending increases. Like Obamacare, this tax-reform legislation was purely a partisan affair, which is rarely the best way forward for major legislation, leaving it open to quick revision, repeal, or slow death (see: Obamacare). Still, precisely because one party could muscle through something, regardless of how controversial and unpopular (tax reform, like Obamacare at its passage, is polling terribly with the public), it's relatively easy. It just takes the determination of the majority party. President Obama and the Democrats had to pull out all the stops and pour "sweeteners" down the throats of recalcitrant party members, many of whom choked to political death (where have you gone, Sen. Ben Nelson of Nebraska?). So here's the thing: What are Republicans going to do on spending? Cutting taxes is the frosting, not the cake, when it comes to actually making America great again. Our $20 trillion national debt (this figure includes both debt with investors and what various parts of the government owe each other and is the most accurate measure) is undoubtedly retarding economic growth for a variety of reasons: src="" allowfullscreen="allowfullscreen" width="560" height="340" frameborder="0"> Balancing budgets and reducing the size, scope, and spending of the federal government is not simply a puritanical accounting fetish. Economists on every point of the political spectrum agree that debt-to-GDP ratios of ov—er 100 percent are a drag on the economy because everyone knows that a major restructuring is coming eventually. Taxes will need to go up, services will need to be cut, and inflation will rise—or most likely, some combination of all three. As it happens, the modern Republican Party, at least since the Reagan era, has defined itself as the party of low taxes and low spending. That ideological commitment has been purely rhetorical of course, with George W. Bush and his GOP majority in particular blowing out the federal budget in then-unprecedented ways. But that was then, right? And this More precisely: This was now. Earlier in December and almost certainly as a way to disarm budget hawks, Speaker Paul Ryan pledged that right after tax cuts, the GOP would start work on cutting spending, especially on entitlements. Here his on December 6: "We're going to have to get back next year at entitlement reform, which is how you tackle the debt and the deficit," Ryan said during an appearance on Ross Kaminsky's talk radio show. ". . . Frankly, it's the health care entitlements that are the big drivers of our debt, so we spend more time on the health care entitlements - because that's really where the problem lies, fiscally speaking." Republican tax-cut activist Grover Norquist told me the same thing in a pre-passage interview: Norquist: ...April 2018, we're going to do welfare reform. Welfare, TANF is a very small number. We're going to add food stamps, a very small number, well 75 billion or so. It's not too small. And we're going to add in Medicaid which is a quarter of all state and local budgets. And take those together and probably also what's left of Obamacare in terms of spending and block rent those to the states and limit their growth to below the way it's growing now. So that you out 10 years or whatever, ask Peter [Ferrara] what the [...]

Democrats Are Fooling Themselves About Tax Reform's Unpopularity

Fri, 22 Dec 2017 00:30:00 -0500

According to political analysts, 2018 Democrats will use the just-passed tax reform as a way to argue that the Republican Party is the party of the plutocracy, which is another way of saying that Democrats are going to use the same argument they've been using for the past three decades with varying degrees of success. A number of liberals have claimed that the passage of "unpopular" tax reform is historically analogous to the passage of Obamacare, which triggered the loss of hundreds of Democrat seats and, perhaps, control of the presidency. This is wishful thinking for a number of reasons. Yes, the tax bill is unpopular. Then again, I'm not sure you've noticed that everything Washington, D.C., tries to do is unpopular. Nothing polls well. Not the president. Not Congress. Not Democrats. Not legislation. Not even erstwhile popular vote-winning candidates. Certainly, a bill being bombarded with hysterical end-of-the-world claims that are rarely debunked by the political media is not going to be popular. Republicans won't pass anything if they wait around for things to be popular. However—apologies to House Minority Leader Nancy Pelosi—they can be somewhat content knowing that voters will probably like it once they find out what's in it. Why do so many Americans believe that the middle class is getting a tax hike? Because outlets they trust are constantly lying to them. Both in framing and content, the coverage of the tax cuts has been impressively dishonest. "One-Third of Middle Class Families Could End up Paying More Under the GOP Tax Plan" writes Time Money (they won't). An Associated Press headline reads, "House Passes First Rewrite of Nation's Tax Laws in Three Decades, Providing Steep Tax Cuts for Businesses, the Wealthy." And so on. There will always be ideological arguments regarding the efficacy of tax cuts for corporations and the wealthy, but at some point people are going to find out that they've gotten one, too. The nonpartisan liberals at the Tax Policy Center concede that 80 percent of Americans will see a tax cut in 2018, and that the average cut will be $2,140—which might be something to scoff at in D.C., but I imagine a bunch of voters surprised by these savings will be less cynical. Only 4.8 percent of Americans will see a tax increase. Like Obamacare, people don't know what's in the bill. But unlike Obamacare, the repeal of the individual insurance mandate gives millions a choice. The passage of Obamacare, after all, upended lives. The Affordable Care Act became synonymous with "health care insurance," and voters attributed everything that went wrong with that insurance to the bill. And since Democrats offered a litany of fantastical promises about the future of health care, the disapproval was well-deserved. Millions began seeing their insurance plans discontinued as soon as Obamacare was implemented, despite assurances from the president and pliant Democrats that no such thing would happen. For many, premiums in the individual markets doubled over four years of Obamacare. Voters dealt with these tangible, real-life consequences. Whatever valid concerns there are about debt or spending (and they are valid), it is unlikely that tax cuts will have similar long-term consequences on voting as those on health care. It is more likely that tax cuts will do little to change the dynamics of the coming years. But it is plausible that because of the overreaction from the left, millions of Americans who thought they were going pay more in taxes will find a new child credit and be thankful. As an ideological matter, every time a Democrat claims that keeping more of your own money is tantamount to "stealing"—which happens often—voters should remember this is fundamentally a debate between people who believe the state should have first dib[...]

You Won't Be Able to Pay Taxes on a Postcard, and That's Exactly How H&R Block Likes It

Wed, 20 Dec 2017 15:55:00 -0500

When House Republican leaders unveiled a tax reform bill on November 2, they made a bold promise. "This is a complete redesign of the code, so we can simplify it so much that nine out of 10 Americans can file using a postcard-style system," said Ways and Means Committee Chair Kevin Brady (R-Texas). President Donald Trump noted what that could mean for businesses that make their living off helping Americans navigate the awful, complex federal tax code. "The only people that aren't going to like this is H&R Block," Trump said later that same day. "They're not going to be very happy." It was indeed bad news for H&R Block. Shares of the company's stock fell 2.7 percent that day. But this afternoon, as the House cast the final vote on the Tax Cuts And Jobs Act, H&R Block's stock was trading at about $28 per share, up 13.8 percent from where it was on November 2. Intuit Inc., which owns the TurboTax brand, has seen its shares rise by about 5.5 percent over the same period. I'm happy for the shareholders of H&R Block, who will be rewarded for their investment in the company. But the drop and subsequent rise of the company's stock tells you something about how the promises made for the Republican tax bill differ from the reality of the final text. Americans will not, in fact, be able to file their income taxes on the back of a postcard, and the bill does not do much to simplify the tax code (though the higher standard deduction does mean that fewer households will have to itemize deductions, a welcome change). As Kevin Carmichael pointed out at FiveThirtyEight today, increasing the standard deduction doesn't do a whole lot for most people, because even families that take the standard deduction still often need help with their taxes. Simplifying the tax code in a meaningful way would have meant removing the various credits, deductions, and gimmicks littered throughout the code. Most of those remain. Listen to the talking points Republicans are using this week. They aren't saying anything about paying your taxes on a postcard now. Nor is there much bragging about how many pages have been cut from the tax code. The code is still complicated, and so the tax prep companies win. This isn't new territory for them. Intuit spent handsomely in 2013 to defeat a Democratic proposal that would have had the IRS pre-fill tax forms for taxpayers, as a 2013 Propublica investigation revealed. Since 1998, major tax preparers have spent almost $28 million lobbying Congress, according to the Center for Responsive Politics, a pro-transparency think tank. They had help, of course. A multitude of special interests deploy legions of lobbyists—like this asshole—to preserve or create exemptions, breaks, and credits. That's why the idea of a postcard-sized tax form has always been a pipe dream. The new tax bill means most Americans will get to keep more of the money they earn. And that's great, because they'll need that money to pay their accountants.[...]

Trump's Phony Postcard Tax Return

Wed, 20 Dec 2017 00:01:00 -0500

At a meeting with congressional leaders last month, Donald Trump kissed a postcard-sized tax form, expressing his commitment to simplification of the hideously complex Internal Revenue Code. "Over 90 percent of Americans are going to fill out taxes on that postcard," Treasury Secretary Steve Mnuchin promised on Sunday. That's not really true, because the bill that emerged from Congress this week does little to simplify the tax code and in some ways makes it even more complicated. The tax return on a postcard, originally a symbol of radical reform, has become a gimmick aimed at distracting the public from a revenue collection system that is just as confusing, frustrating, intrusive, and manipulative as ever. Hoover Institution economists Robert Hall and Alvin Rabushka promoted the idea of a "postcard tax return" in their 1985 book The Flat Tax, tying it to the elimination of deductions, credits, and every tax bracket but one. Under Hall and Rabushka's plan, everyone would pay a single rate on all forms of income after subtracting a "personal allowance" aimed at maintaining progressivity. The postcard tax return touted by Trump and Mnuchin, by contrast, is tied to a tax bill that retains seven income brackets (while redefining them and fiddling with the rates) and all the major tax breaks, including the ones for charitable donations, mortgage interest, and state and local taxes. The limits that the bill imposes on the latter two deductions will make tax preparation more rather than less complicated, since filers will have to figure out how much of those expenditures can be subtracted from their taxable income. The Trump administration's postcard promise is based on a trick that the Tax Policy Center's Roberton Williams highlighted last year: shifting the figuring off the main form. Most of the items on the "Simple, Fair 'Postcard' Tax Filing" that the president kissed, such as "wage and compensation income," "contributions to specified savings plans," "earned income credit," and child credits (doubled under the tax bill but still phased out as income rises), require additional consultation, consideration, and calculation. The main rationale for the claim that the tax bill simplifies returns is the near-doubling of the standard deduction (which is coupled with the elimination of personal and dependent exemptions). That change is expected to reduce the share of filers who itemize from 30 percent to 6 percent. The problem is that taxpayers still won't know whether the standard deduction exceeds their potential itemized deductions unless they go to the trouble of documenting the latter throughout the year and running the numbers when they prepare their returns. That work also does not show up on the postcard return. The tax bill introduces new wrinkles, including a 20-percent deduction for "pass-through" income from businesses such as partnerships and sole proprietorships, which is reported on individual returns. The upshot is that the tax rate for pass-through income will be lower than the individual income rate (but higher than the new, lower corporate rate), inviting new forms of tax gamesmanship. The last thing our tax system needs is more complexity. According to the Tax Foundation, the Internal Revenue Code, which totals 2.4 million words, is nearly six times as long as it was in 1955 and almost twice as long as it was in 1985. That's not including 7.7 million words of tax regulations or 60,000 pages of relevant case law. The Tax Foundation says complying with IRS filing requirements consumed nearly 9 billion hours last year, at a cost of more than $400 billion. That's not including billions of dollars in costs resulting from suboptimal economic decisions encouraged by the tax code, or the damage do[...]

The GOP Tax Bill Isn’t the End of the World. Far From It.

Tue, 19 Dec 2017 14:02:00 -0500

Sometime today, both the House and the Senate will hold final votes on the tax legislation that has been working its way through Congress this year. And then, tomorrow, President Trump will sign it into law. Democrats have treated the bill's passage as an apocalyptic event. Earlier this month, when a previous iteration of the bill passed in the Senate, Nancy Pelosi, the Democratic House Minority Leader, declared that it was literally the apocalypse. "It is the end of the world," she said, singling out the bill's repeal of the individual mandate. "This is Armageddon." How perilous the world must seem to her that this muddled bit of tax cutting could bring it all down. Pelosi's apoplectic reaction offers, among other things, a reminder of how long it has been since Republicans last passed major legislation, and how unhinged the responses to such an event can be. The Tax Cuts and Jobs Act (TCJA) is not the end of the world, nor anything close. It is not even, unfortunately, the end of the tax code as we know it. Instead, it is a predictable, conventional piece of Republican tax legislation, one that cuts taxes for corporations and individuals while sharply increasing the deficit. It is the sort of thing you can imagine passing, more or less, under Mitt Romney or John McCain or Jeb Bush. Which means, of course, that it has all the problems, and benefits, of conventional Republican thinking about taxes. Among those benefits is the bill's centerpiece: a permanent reduction in the corporate tax rate, from 35 percent, the highest in the developed world, down to 21 percent. There is little serious disagreement amongst mainstream economists that America's corporate tax rate is too high. In 2012, President Obama proposed slashing it to 28 percent. Predictably, the Republican plan goes further, but it still leaves America with a rate that is higher than the European average of 18.8 percent. Cutting corporate taxes may not provide the sort of quick boost to job creation or economic growth that some of its more enthusiastic backers claim. But it positions the nation to be more competitive internationally in the long term by permanently reducing the cost of doing business in the United States. Corporations are not the only beneficiaries of the bill's cuts to tax rates, however. The plan cuts tax rates across all seven tax brackets, doubles the standard deduction (while eliminating the personal exemption), expands the child tax credit, and alters the alternative minimum tax so that it will affect fewer people. According to an analysis the Tax Policy Center, these changes would reduce taxes for every income group. Only about five percent of taxpayers would pay more next year. The bill is broadly unpopular, and has been widely misunderstood by the public, with one recent poll showing that a majority of the public believes their taxes will go up under the bill. In fact, it will reduce taxes for most Americans. If you are reading this, you will most likely get to keep more of your money as a direct result of this legislation. At least, that is, for the next several years. The individual tax reductions, including the doubling of the standard deduction, are all set to expire at the end of 2025. This is where the bill's problems become more apparent. Sunsetting these provisions allows the bill to comply with the Senate's self-imposed requirement that the bill not increase the deficit by more than $1.5 trillion over the next decade. Republicans, however, have argued that the provisions won't really expire, because no future Congress would allow middle-class taxes to rise. "Those are sunsets that will never occur, we don't believe will ever occur, we don't intend to ever occur," House Speaker Paul[...]

Holiday Cheer Means Reasonably Priced, Smuggled Booze

Tue, 19 Dec 2017 00:01:00 -0500

Keeping the old punch bowl filled can get spendy at this time of year, so you can't blame Juncheng Chen for making an epic party run to try to keep costs down. Unfortunately, officials in his home state of New York don't like it when their captive subjects drive across the border to stock up in jurisdictions where the booze prices are cheaper. They arrested him earlier this month and issued a press release about law enforcement's great blow against frugal scofflawry. "Juncheng Chen, 45, of 136-18 64th Road, Flushing, Queens, was arrested by investigators with the Tax Department's Criminal Investigations Division after his vehicle was stopped by New York State Police in Rye, NY. The vehicle was packed with 757 liters of liquor, which Chen allegedly purchased at five different liquor outlets in New Hampshire." "Alcohol-related tax evasion, as this case clearly shows, is on our radar," tutted Acting Commissioner Nonie Manion of the New York State Department of Taxation and Finance. Officials estimated they lost out on about $1,288 in liquor taxes because of Chen's shopping trip—money, that is, that the man had planned on saving himself, his friends, and his customers by making purchases in a jurisdiction where the government was less sticky-fingered. New York, as it turns out, taxes booze at $6.44 per gallon. Hefty as that sounds, that's only somewhere around the middle of the pack, as U.S. states go. But people are natural comparison shoppers, and bargains abound. "Spirits are taxed the least in Wyoming and New Hampshire, where government-run stores have set prices low enough that they are comparable to having no taxes on spirits," notes the Tax Foundation. With such a price differential at hand, why not make a long-distance party run and split the savings with some lucky customers? Well, except that state officials get pissy if they catch you. In fact, smuggling booze from lower-taxed states is quite the cottage industry in New York. "Anytime you order a cocktail or buy a bottle of liquor in New York, there's a one in four chance that the booze has been smuggled in from out of state," Crain's New York Business estimated last year. The state's claimed loss from smuggling—or, more accurately, the revenue officials anticipated but that never materialized because people went shopping across the state line—is estimated at $1.6 billion. Oddly enough, state officials do actually seem to have a clue as to why people would drive all the way from Queens to New Hampshire to purchase their seasonal cheer. "The New York State tax on liquor is relatively high compared to other forms of alcohol and to other states," the New York State Division of the Budget acknowledged in its 2011-2012 Executive Report. "The State continues to suffer tax avoidance and evasion due to the bootlegging of liquor from other states." The report raised hopes about higher fines and enforcement provisions "moderating year-over-year declines in State alcoholic beverage tax receipts." Yet here we are half a decade later, and enough people see the same potential profit that Jungchen Chen saw in making a party run to New Hampshire or elsewhere (Maryland, Delaware…) that a quarter of the booze in the Empire State is smuggled in. You'd think that New York officials might learn that lowering taxes so that prices in the state aren't so dramatically higher than elsewhere would be the best way to deter smuggling, but there's really no evidence that officials are capable of learning. After all, New York is the state that prides itself on having the highest cigarette taxes in the country ($4.35 per pack statewide, and $5.85 in New York City), but has never seemed to understand why the inev[...]