STUMP » Articles » Taxing Tuesday: Let a Hundred Excellence Funds Bloom » 30 January 2018, 03:34

Where Stu & MP spout off about everything.

Taxing Tuesday: Let a Hundred Excellence Funds Bloom  

by

30 January 2018, 03:34

They’ll be about as successful as Mao’s own campaign.


Shot across the bow:


More info here.

Megan McArdle explains how none of this ‘cleverness’ is going to work.

An excerpt:

Law professor Andy Grewal took a deep dive into the law surrounding this strategy [state taxes as charity], and came up holding some bad news: “If a taxpayer has a fixed state income tax liability but receives a credit against that liability for any payments directed to state agencies or subdivisions, it is hard to see why the characterization of the payment will change.” In other words: nice try, guys, but this probably isn’t going to work.
….
Jonathan Adler, who teaches law at Case Western, was even more pungent, and succinct. While we don’t know what form the complaint will eventually take, since the states haven’t yet drafted it, “What we have seen [so far] would suggest that there is some sort of constitutional right to a SALT deduction. To state the claim is to refute it.”

Given the problems with all of these strategies, it is a measure of state desperation that these are the ideas on the table — and that they are being seriously considered. In the end, these places may even be forced to consider the truly audacious Option 4: cut their taxes and learn to live within a new, tighter budget.

Essentially, they can’t. Because pensions.

But that’s for another time.

And yay, my tax money getting wasted:


ILLINOIS ENTERS WITH A BOGUS CHARITY

Instead of property tax relief measure, Illinois lawmakers file tax reform sidestep

Rather than working to lower one of the nation’s highest property tax burdens, some Illinois lawmakers want to sidestep the federal tax reform bill by allowing for donations to government.

One bill would create the Illinois Excellence Fund. It would allow taxpayers to donate and receive a tax credit for the exact amount. This shuffling of money back and forth would allow a taxpayer to deduct that amount on their federal taxes, effectively thwarting the $10,000 cap on state and local tax deductions put in place by the tax reform bill passed last month. The state treasurer can then use that money as he sees fit.

That totally sounds like a charity to me.

Right?

Interestingly, the governor of Illinois has some comments:

Federal Tax Reform: a relief for taxpayers, a message for legislators
1/19/2018
The federal tax reform signed into law before Christmas means tax relief is coming for the vast majority of Illinois families and businesses starting in 2018. As important, the reforms send a clear message to the Illinois General Assembly: Get busy reducing state and local taxes. ​​​ ​

…..
The message to taxi​ng authorities in our state is clear.

It’s time for Illinois to get its fiscal house in order so that Illinoisans can fully share in the benefits of tax relief and the economic growth it is stimulating.

Illinois’ state and local governments have been on a tax-hiking frenzy in recent years. The effects have been somewhat disguised by the deductibility of state and local taxes.

  • Illinois’ high state and local taxes are the No. 1 reason so many people are leaving the state, according to polling from the Paul Simon Institute.

  • Illinois’ high property taxes have weakened the state’s housing market, eaten away at home values and forced Illinoisans to leave for other states.

  • Illinois’ high taxes stifle pro-growth policies and constrain investments in new business and new jobs.

Federal tax reform provides a window of opportunity to create economic benefits for all Illinoisans. State and local lawmakers should make the most of it. They should rein in spending, roll back tax hikes, and pass reforms that ignite business growth, strengthen housing markets, and stimulate job creation.

That’s a message that state government has waited way too long to deliver to the people who are paying the bills.

I doubt this will do much.

As, unfortunately, but extremely foreseeably, Illinois has a huge debt overhang from their underfunded pensions.

MARYLAND TRIES ITS OWN CHARITY: PUBLIC SCHOOLS

Maryland Democrats unveil bills to offset changes in federal tax law

Maryland Democrats on Tuesday introduced a package of bills aimed at reversing the impact recent changes to the federal tax code will have on taxpayers and state coffers, their latest effort to roll back changes imposed by President Trump and the ­GOP-controlled Congress.

Gov. Larry Hogan ®, who has pledged to return to taxpayers any revenue they owe the state as a result of new U.S. tax law, said he was “thrilled” at similar ­efforts by the Democratic leaders, even as he bickered with them about the protocol surrounding the unveiling Wednesday of his state budget proposal.

Senate President Thomas V. Mike Miller Jr. (D-Calvert) and House Speaker Michael E. Busch (D-Anne Arundel) said they want to allow taxpayers to receive a state tax credit for donations made to a new state-run charity that would benefit public schools; lower the threshold on taxing the inheritance left by wealthy residents; and restore personal exemptions on state tax returns.

Good that they’re fixing the coupling to the federal tax policy. If they’re going to do an estate tax, they should set the levels they want; if they want personal exemptions, they should have that in their own tax code as opposed to pointing over at the feds and saying “What they did.”

That is one bonus to the new bill, at the very least. It requires state legislators to make their own laws instead of slavishly following the feds.

Maybe this new federalism idea will catch on.

Let’s see about this charity idea:

The state-run charity that would be created by the Democratic legislation would benefit public schools, according to bill sponsor and House Majority Leader Del. C. William Frick ­(D-Montgomery). It is designed to allow donors to offset the limits federal tax law places on deductions for state taxes starting this year.

Frick said taxpayers who donate would receive a 95 percent state tax credit.

“The state is held harmless because we’ll get the same amount of revenue either way, but this provides flexibility for the taxpayers,” Frick said.

So I guess the theory here is that if one doesn’t get 100% of a tax credit, it’s charity?

Is that the concept?

I doubt this is going to work out the way they expect.

MILLIONAIRES TAXES: CALIFORNIA, NEW YORK, NEW JERSEY

I really don’t get the New Jersey one. At least California has a nice coastline for some scenic living, and New York has New York City and all that entails.

But what’s the draw for NJ? That it’s cheaper than NY, and that’s it. If it’s no longer cheaper, you might as well go where there’s a better night life or nicer places to live.

California Needs to Keep Its Millionaires

Introducing his state budget proposal earlier this month, California Governor Jerry Brown said out loud what many legislators in Sacramento fear: That California’s highly progressive income tax may be unsustainable in the wake of the Republican tax bill signed in December by President Donald Trump.

“People with higher incomes pay a lot more money, and some of them may be tempted to leave,” Brown said.

California is unusually reliant on income tax to fund the state’s $183 billion budget. And almost half of state income taxes are paid by the wealthiest 1 percent of earners, for whom the top marginal rate is 12.3 percent, with an additional 1 percent charge on incomes over $1 million.

That’s pretty damn high as a state income tax.

And that’s a tax that already exists in California.

But it’s noticed that perhaps it’s not just the millionaires under pressure.

It’s unclear what the breaking point would be for California millionaires. Hollywood has been spreading production around the country, but executive offices and ancillary industries such as talent representation are still concentrated in Los Angeles. The tech industry in Silicon Valley has enticing alternatives in Utah, Texas and elsewhere. But Google, Apple and other elite companies seem to believe that Northern California holds unique value.

While millionaires are inclined to stay put, the stress point may be significantly lower for the merely affluent, who have less of a cushion against higher taxes and the state’s already high cost of living. Upper-middle-class taxpayers may be the real source of vulnerability for California.

There’s no good way to reimburse such taxpayers on the higher taxes they’ll pay to the federal government. And unlike paying higher taxes to strengthen the safety net or build infrastructure or improve education, there’s no psychic benefit to paying more so that people far wealthier than yourself can pay less.

I guess we’ll be finding out exactly how “nice” California is to live in.

New York State’s millionaire tax is a mere 8.82%, according to that link, and the regular ole high income people like me are taxed at 6.65%. Quite a bit lower than California.

Mayor deBlasio wants a NYC millionaire’s tax to pay for goodies:

Millionaires love New York too much to flee if their taxes get jacked up, Mayor de Blasio said Sunday.

De Blasio — who is pushing a tax on the wealthy to raise funds for the MTA against long odds in Albany — said he’s not worried the city would end up losing money as the wealthy head for the exits.

“We see a steady stream of very successful people who want to live in New York City. You’re an example,” de Blasio told supermarket mogul John Catsimatidis on his AM 970 radio show.

“There’s a lot of other people who are really devoted to living in New York City because of all we have to offer, (who) are not going to only live here for half a year because of tax issues,” he said.

And I remember the people in my co-op who lived a half year and a day in Florida to avoid NY&NYC taxes.

Rush Limbaugh won’t earn any money in NY because of the issue.

Thing is, of course, is that de Blasio can’t set NYC taxes at all. Amusingly, most NYC policy is set in Albany. The city council is left with nothing issues like whether to tear down a Columbus statue or whether to bitch about the St. Patrick’s Day Parade.

For the finale, here’s the New Jersey piece.

Phil Murphy: Don’t worry, Jersey, I only want higher taxes on millionaires

Gov. Phil Murphy on Wednesday said most of New Jersey shouldn’t be worried about higher taxes, saying his campaign promise to raise the millionaires tax truly means he’s targeting millionaires.

Murphy pledged to “rebuild the middle class” in his first national television interview.

….
Todd pressed Murphy on how he defined “middle class,” asking, “If you’re a family of four, and your income is $500,000, are you going to get a tax increase?”

“No, when we talk about a millionaire’s tax, that’s a millionaire,” the governor said.

“Nobody that makes less than half a million dollars a year is going to get a new tax?” Todd asked him.

“You’re not going to get taxed,” Murphy said.

“In fact, I’ll tell you the opposite. You’ve had to live with not only your property taxes going up, your fares to ride NJ Transit — which is a disaster — have gone up meaningfully. (It costs more) to cross the Hudson River, to get your health care, whatever it might be. The middle class has been ravaged. Our job is to rebuild the middle class.”

Yeah, we’ll see. According to this, Murphy’s income was well over $1 million before he made governor

News reports say Murphy and his wife Tammy had $4.6 million in income last year. Even if they have a brilliant accountant, they’re likely paying in excess of $300,000 a year in state income tax.

Murphy has said repeatedly that the super-rich are not paying their “fair share” of taxes. At half a million a year, I say he’s paying his fair share of taxes.

He may be paying his fair share of taxes, but really, he should be “donating” more to the state.

It’s only fair.

PROPERTY TAX CAP HITTING CITIES

GOP Tax Law Could Starve Cities of Revenue

Housing experts predict that the tax overhaul will spur home values and property tax revenues to drop, forcing cities to find new ways to raise money — or to cut spending.

No, not that! Not cutting spending!

The new cap on mortgage interest deduction and state and local tax means only 14.4 percent of homes are valuable enough to incentivize their owners to itemize instead of taking the standard deduction.

n other words, the vast majority of homeowners will take the standard deduction, which analysts expect to drive down property values. And that means significantly less revenue for cities.

“Only 6 percent of homeowners have mortgages exceeding $750,000, and only 5 percent pay more than $10,000 in property taxes, but most homeowners won’t itemize under the new regime,” said Elizabeth Mendenhall, president of the National Association of Realtors, in a statement released after passage of the new tax code.

Sound just fine to me. Why itemization should drive house prices is insane.

The results could be chilling on housing markets nationwide, with estimates ranging from a 4 percent drop in home prices (according to Moody’s) to a 10 percent drop (according to the National Association of Realtors). Hotter markets in states and municipalities with higher property tax burdens — such as New York, California and the Washington, D.C. metro area — could experience more precipitous drops in home prices, according to Moody’s.

Yeah, I expect so. It was my own fault for buying at the top of the market. It would be annoying if I were plunged underwater again.

The blow to the housing market could ripple throughout municipal finance structures, since cities rely on property tax for nearly half of their revenue. According to the Tax Policy Center, local governments collected $442 billion in property tax in 2013, the most recent year data for which data was collected — 47 percent of the general revenue collected by those municipalities. In Northeast states, including Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, and Rhode Island, property taxes accounted for three quarters of local tax revenues.

I bet they did. Maybe they should rethink their tax structures.

WOULD THE ELECTORAL MAP CHANGE?

People flocking to low-tax states could swing future elections

A report I have authored with Arthur Laffer for the past decade, “Rich States, Poor States,” has tracked this movement, as Americans “vote with their feet” across state lines. Our research provides policymakers timely data linking migration to state-level policy decisions and economic competitiveness.

In general, states that keep taxes low and provide a competitive business climate perform far better than the states that follow the tax-and-spend approach.

In terms of overall population changes over the past year, that finding is once again confirmed. The United States has grown to nearly 327 million residents, with highly competitive economies in Idaho, Nevada and Utah leading the way this past year in percentage growth.
….
The state with the largest downside risk appears to be Illinois, which will lose one congressional seat in 2020 and is in danger of being the only state in the U.S. to lose two seats.

Illinois suffered the largest net population loss of any state in the past year, and due to that loss, it was overtaken by Pennsylvania this year as the fifth-largest state in the country. Major tax increases passed in 2017 will certainly not help this downward economic spiral.

The 2017 Census estimates also contain some troubling news for the nation’s largest state, California. While the 2010 Census was the first in state history to not add an additional congressional seat, 2020 could be worse for the Golden State.

I hope Illinois loses two seats (and NY is expected to lose one).

One thing that various conservatives in low tax states worry about is you get people coming from high tax ways, bitch about how they can’t get all they got in their old states, and start voting up taxes and services.

I guess we may see. What is interesting, obviously, is the tax reform bill is coming so that people may see the hit they took for 2018 taxes in April 2019, which could spur people to move before the April 2020, which is the day the decennial Census is based on.

I will probably still be in New York on that day, but who knows?

Here is the Rich States, Poor States analysis. Looks interesting.

FEDS COULD LOSE MONEY!

That assumes, of course, all the “cleverness” is allowed to stand. (I don’t believe it will be)

State Tax Workarounds Could Mean $154 Billion Lost to Treasury

New York state lawmakers could punch a $50.6 billion hole in the federal government’s budget by revamping their state income tax.

If California followed the same approach, its legislature could keep $66.8 billion out of the U.S. Treasury. And in New Jersey, state lawmakers could hold back $12.5 billion more.

Their plans face obstacles, and not every state is pursuing the same strategy. But five Democratic-leaning states that are exploring ways to change their tax laws could remove roughly $154 billion from federal coffers over the next eight years, adding to anticipated deficits, according to an analysis compiled by Bloomberg in conjunction with Daniel Hemel, a professor at the University of Chicago Law School.

Do you know how big “anticipated deficits” are?

The most recent CBO estimate for the 10-year deficits:

This letter responds to your request for information about the estimated
deficits and debt under the Conference Agreement of H.R. 1 as filed by the
Conferees on December 15, 2017. The Congressional Budget Office and the
staff of the Joint Committee on Taxation determined that provisions in the
Conference Agreement would increase deficits over the 2018-2027 period by
$1.5 trillion (not including any macroeconomic effects). By CBO’s estimate,
additional debt service would boost the 10-year increase in deficits to $1.8
trillion.

They’ve got a little table, so let me graph that year-by-year.

I put that total 8-year impact as a line. If I add up the items, I see that $154 billion is 1.7% of the total projected federal deficits for those 8 years. Compared to the tax bill impact, it’s only 9.3% of that.

So it’s not nothing. If the feds don’t do anything about the “cleverness”, federal revenues will barely be affected, though.

I don’t expect the feds to do nothing, though.

Amusing to me, the go-to tax expert they quote is yet again Hemel, he of the cleverness and he of the concept for NY to release Trump’s state tax returns (which has not happened). While past performance does not dictate future results, I think it can be pretty indicative in this case.

But let’s see what Hemel says:

Their plans face obstacles, and not every state is pursuing the same strategy. But five Democratic-leaning states that are exploring ways to change their tax laws could remove roughly $154 billion from federal coffers over the next eight years, adding to anticipated deficits, according to an analysis compiled by Bloomberg in conjunction with Daniel Hemel, a professor at the University of Chicago Law School.

….
To see what that kind of change could mean for federal revenues, Hemel created a formula to apply to state data. The resulting $154 billion total included $16.8 billion for Illinois and $7.5 billion for Connecticut.

Spokesmen for the White House and for Congress’s main tax-writing committees didn’t respond to requests for comment on the analysis.

…..
Sinatra’s Line

Hemel said he thinks New York can work through the challenges presented by its progressive state income tax and its many commuters from other states, showing the way for other states with flatter tax systems and fewer cross-border commuters. “Frank Sinatra’s line applies well here: If this can make it there, it can make it anywhere,” he said.

You mean like how New York could release Trump’s tax returns?

Oh, this is rich.

I’m just saying it’s a yuuuge if.

Hemel’s analysis of the payroll-tax plan relies on statewide wage income figures, an average state income tax rate, an average marginal federal tax rate, and an assumption for the percentage share of state income taxes that won’t be deductible under the new tax law.

etc. etc.

It’s not a bad way to estimate potential impact, for what it’s worth.

It’s just a bad idea to think that the Congress is not going to react to all this “cleverness”. Note that they keep getting no comments from the people who just wrote and passed the tax bill. Or some noncommittal noise.

Just because they’re not saying they’ll react does not mean they won’t react.

I grabbed a hold of these academic papers – The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the New Legislation and The Games They Will Play: An Update on the Conference Committee Tax Bill – and did a quick readthrough. They include everything I’ve written about before (and some more esoteric stuff relevant to my day job), and looking very quickly, I see they don’t address federal responses. They need to follow their reasoning just a wee bit further.

This is going to be “fun”.


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