STUMP » Articles » Taxing Tuesday: DOOOOOOOM and more DOOOOOOOOM » 20 February 2018, 08:02

I’m going to let Governing magazin kick this post off.

The Week in Public Finance: Tax Reform Isn’t Over — Here Come the States

States are exploring tax changes in response to the federal overhaul. The proposals in Iowa and New York this week may just be the tip of the iceberg.

The implications of the federal tax overhaul are keeping state lawmakers busy this year in what would otherwise be a quiet, election-year legislative session. This week, two governors proposed major tax changes of their own.

[skipping over the New York bit, because I will address that below]

….
Meanwhile, in Iowa, Gov. Kim Reynolds unveiled her plan for major cuts — as much as 23 percent — in state income taxes. She also wants to simplify the state tax code and lower taxes for middle-class Iowans and small business owners. Reynolds’ office estimates the plan would cut income taxes by $1.7 billion over four years while maintaining expected growth in state revenue.

The proposed changes were spurred, in part, by a provision in Iowa’s tax code that allows Iowa taxpayers to deduct what they paid in federal income taxes from their state tax liability. It creates an inverse relationship with federal taxes, whereby Iowans federal taxes will go down, but their state taxes will go up.

Okay, that’s a bit weird. There can be extremely odd feedback loops with that.

That’s true in California, Connecticut and Maryland, where, like New York, officials are contemplating SALT workarounds. Their proposals would allow for tax deductible charitable contributions to special state funds in lieu of a traditional state tax payment. And in Michigan, lawmakers reached a deal this week to add back the state’s personal exemption deduction, which was zeroed out under the new tax law in favor of a higher standard deducation. Since Michigan’s tax code is tied to the federal tax code, its personal exemption was also zeroed out. Unchanged, it could have cost Michiganders more than $1 billion.

Again, I have no particular issue with states de-coupling their tax policy from the federal tax policy. Sounds like a great idea to me – structure the taxes so that they make sense for the people in your state.

But remember you can’t really do much about changing federal taxes, as a state legislature. They got rid of state legislatures appointing U.S. senators with the 17th Amendment, so you have no hope of directly changing any of that.

Still, it remains to be seen how far states will get with proposals that require more than shifting around tax definitions. For instance, Republicans in New York have already panned Cuomo’s legislation as being too complicated. And the short time frame — most state legislative sessions run just two more months — makes it difficult to hammer through anything that may require buy-in from lots of stakeholders.

Yeah, about that proposal. Let’s look below.

NEW YORK

Oh dear lord, they’re going to try to do this, aren’t they.

From income taxes to payroll taxes: What to know about Cuomo’s plan

ALBANY – The Cuomo administration on Monday proposed a new payroll tax system and a charitable contribution program to shield New Yorkers who will be limited in how much they can deduct in state and local taxes.

…..
Budget Director Robert Mujica said Cuomo is adding to his budget proposal an “employer compensation expense tax” that would be optional for employers and employees as a way to work around the federal-deduction limit.

Mujica insisted businesses and employees would be kept whole if the changes are put into law by the state Legislature as part of the state budget for the fiscal year that starts April 1.

“There’s no increase for the employer and no increase for the employee,” he said.

What if someone is self-employed?

Secondly, Cuomo’s office proposed two new charitable contribution programs, one for health care and one for education.

People could contribute money to pay for the state services, and the charitable contributions would be tax-deductible.

So taxpayers who itemize their deductions would be able to claim the new contributions on their state and local taxes — a way to get around the $10,000 deduction cap.

…..

The proposal would also provide a state tax credit equal to 85 percent of the charitable donation when people file their taxes. They would also be credited back what they contributed, so their total local tax bill would be unchanged.

Yeaaaah, and when the IRS says “that ain’t a charity”, people are gonna be really pissed.

What about employees?

Mujica said the plan would be revenue-neutral for the state, but help keep wealthy New Yorkers who would be most affected by the deduction cap from leaving the state, which would be a hit to the state’s tax coffers.

“Federal law prohibits deductions for individuals. However, they still allow employer-side taxes, taxes on payroll, to remain deductible,” Mujica said.

“So to maximize deductibility, we’re going to provide options for employers to be able to protect their employees from this tax increase.”

Employers could opt in by Oct. 1 to participate.

This is all about protecting high income people — or rather, protecting them enough from federal taxes so that New York can milk them more. Those of more modest incomes will not be hitting the state/local tax cap.

“The creation of a charitable contribution mechanism is more palatable to the state’s business community, but its value will depend on IRS deductibility.”

Indeed, it is unclear whether the IRS would even allow any of what Cuomo is proposing.

Yup. If these “clever” ideas are not deductible, New York will just have made the situation worse for many people.

Cuomo’s office is making one change that the sides agree on. His 30-day amendments to the budget include a provision that would decouple state taxes from the federal plan, a move that will save New Yorkers about $1.5 billion a year.

Yes, and I expect that one to pass quickly without much debate.

In New York, the average so-called SALT deduction in 2015 was about $22,000, according to the state Comptroller’s Office.

But critics said Cuomo isn’t taking into account the savings that most New Yorkers will receive under the federal law, such as lower income-tax rates, a near doubling of the standard deduction and a higher child tax credit.

“Just because you used to have $10,000 in SALT deductions doesn’t necessarily mean your taxes will rise,” said E.J. McMahon, founder of the Empire Center, a fiscally conservative group in Albany.

“In most cases, they will go down.”

Yup, it’s really only the very-very-high income people who get screwed.

UNINTENDED RESULT: SCREWING THE LITTLE GUY

So here’s something about that payroll tax idea.

Lower Social Security Benefits under Governor Cuomo’s Plan

The second proposal would create an optional employer-side payroll tax in New York. Creating a new payroll tax has a number of policy and legal challenges. In particular, if adopted, this proposal could lower lifetime Social Security benefits for New Yorkers.

Under an initial statement released Monday, New York employers “would be subject to a five percent tax on all annual payroll expenses in excess of $40,000 per employee” if they choose to participate. The plan would phase in over three years. Individuals would receive an offsetting individual income tax credit, to ensure that the plan is revenue-neutral for the state.

The proposal is designed to take advantage of the uncapped SALT deduction for businesses. Under the Tax Cuts and Jobs Act, businesses can still deduct all of their state and local taxes paid, while individuals would be limited to a $10,000 annual cap.

This plan would raise costs on employers. They’d bear the full cost of the employee’s salary and then be subject to an additional 5 percent payroll tax. Proponents of this approach acknowledge that employee “wage[s] would have to drop by the amount of the new payroll tax” to ensure that employers do not have a higher burden. There are obvious concerns due to wage stickiness. It would be difficult for an employer to lower an employee’s wage in response to the new tax. In some cases, such as union employees under a labor contract, it could be almost impossible in the short term.

Although the Cuomo Administration has made some moves to suggest that they’re considering the unintended consequences, there is no indication the governor’s proposal could avoid impacting an individual’s eligibility for federal benefits under Social Security.

Social Security benefits are determined in large part by the employee’s taxable wages during their income-earning years. The Social Security Administration averages the amount earned, after adjusting for inflation, in your 35 highest-earning years. Your “average indexed monthly earnings” are then adjusted based on other factors, such as when you start calculating benefits and how you receive them impacts your benefits received calculation as well. Benefits are reduced, for instance, if an individual decides to accept them early, before their full retirement age.

But that means if an employee receives less in wages than they otherwise would have due to this payroll tax program, their Social Security benefits in retirement would be less.

Now, given that the people who are actually negatively affected by the law are, in general, very high income… say, like me. Like someone who goes over the wage cap… and who would still be above the cap if I took a 5% cut in wage.

So. Why are you screwing over lower-income people? To save rich people?

Great, Democrats. You’re the party for lowering taxes for your high-dollar donators. Sounds like a way to win votes this fall.

But wait — there’s even more screwing!

Finally, this also has the impact of lowering Social Security payroll tax revenues. By lowering the taxable wage base, the federal government will collect less in revenue, putting a strain on the Social Security Administration’s ability to pay benefits for current beneficiaries. This is also true of federal revenues in general. By increasing the SALT deductions taken by businesses, while reducing income for individuals, the federal government’s tax base is being eroded.

You really want to go down this path, Cuomo?

And what if the feds decide your clever payroll tax isn’t deductible? Then you’ll have screwed both the businesses and the employees. People will love you soooo much then.

It’s almost worth the extra tax on myself to see Cuomo kill his political career off by doing this. Of course, he may find that he has trouble selling this bright idea to Democrats in the legislature, much less Republicans. We will see.

NOW FOR A COMIC INTERLUDE

Let’s have a laugh before we get back to DOOOOM.

Pelosi is owning her crumbs comment.

"A banquet for everyone up here, crumbs for everyone down there. I’ll repeat that."

— Erica Werner (@ericawerner) February 15, 2018

The thing is, there are higher taxes coming for people like Pelosi.

And right when high-income people are getting with higher taxes, Pelosi has to bitch about it?

Speaking of “crumbs”:

New GOP ‘Crumbs Act’ Just Reminded Everyone How Out of Touch Nancy Pelosi Really Is:

A GOP member of the House of Representatives announced last week he was introducing legislation to accomplish two goals — help American workers and mock House Minority Leader Nancy Pelosi.

Rep. Todd Rokita of Indiana is calling his bill the CRUMBS Act, which is short for Creating Relief and Useful Middle-Class Benefits and Savings.

The acronym is a reference to Pelosi’s infamous remarks suggesting that the cash bonuses American workers have received following passage of GOP-led tax reform are nothing more than “crumbs.”

“Americans are receiving thousands of dollars in bonuses and more money in their paychecks thanks to President Trump’s tax reform, but out-of-touch Democratic leaders believe they only amount to crumbs,” Rokita said in a statement to Fox News.

“The CRUMBS Act will let Americans keep more of the money they receive as a result of President Trump’s tax reform, and allow them, not the government, to choose how best to spend their bonuses.”

Rokita’s bill ensures that the bonuses workers receive in 2018 thanks to tax reform — up to $2,500 — are tax-free.
….
But Republican politicians, including Trump, have derided the minority leader for her criticisms of the bill.

“She called it crumbs, when people are getting $2,000 and $3,000 and $1,000. That’s not crumbs. That’s a lot of money,” Trump said, as reported by The Arizona Republic.

I assume the “CRUMBS Act” is not really going anywhere (and I have no idea how they would know that a bonus is due to the tax bill… I got a bonus, at the level I was expecting, this year. I’m pretty sure the tax bill wasn’t involved in that. Now, next year’s bonus may depend on the tax bill… because I’m doing a lot of work on how the tax bill is affecting insurers.)

Still, it puts a smirk on one’s face.

PLAYING AROUND WITH A TAX CALCULATOR

The Tax Foundation has a nifty little tool to calculate effects of the tax reform bill.

Try it out for yourself — I will be doing some scenarios later, but there’s plenty in this post already.

MASSACHUSETTS

Pioneer Institute Study Finds New Federal Tax Law Would Exacerbate Economic Damage of Proposition 80

Cap on state and local tax deductions to hit Massachusetts hard

BOSTON – Recent passage of the federal tax overhaul legislation will exacerbate the negative economic impact of Proposition 80, the proposed constitutional amendment scheduled to appear on Massachusetts’ November ballot that would add a 4 percent surtax on annual taxable income over $1 million, according to a new study published by Pioneer Institute.

“The combined effect of Proposition 80 and the Tax Cuts and Jobs Act’s $10,000 limit on deductions for state and local taxes will double the Commonwealth’s effective state tax rate for high-income taxpayers,” said Pioneer Executive Director Jim Stergios. “That is not a good calling card for Massachusetts.”

Pioneer Insti­tute’s analysis of data promulgated by the Internal Revenue Service on components of federal tax returns filed by Massa­chusetts taxpayers demonstrates that the average amount of state income tax paid by a taxpayer with a taxable income greater than $1 million would more than double (after adjustment for the decreased value of the federal tax item­ized deduction) from $153,152 to $318,095.

Hey, making the rich people pay more in taxes… that’s good, right?

Ooooh, hmmm.

Full study here.

DOOOOM IS UNAVOIDABLE

Look, I know New York and Massachusetts will do something to try to reduce the federal tax hit on their highest income taxpayers, and they really don’t have much room to reduce the state taxes (or do they… but that’s for another time). But most of this is really futile.

The lawsuit against the tax bill will go nowhere (other than sucking up a lot of legal fees.)

Sending money to the state and getting even almost full credit for it is not charity.

A state payroll tax, if made high enough to replace the state income tax, will be very regressive and destructive to the businesses in those states (and to the political careers of the governors who champion this.)

Some of this can get rolled back, but the “subsidy” to high income people in high tax states is on full display now for everybody, given the panic of the Democratic politicians in those states (and the few remnant Republicans).

The tax hypocrisy is on display – they have to keep disparaging tax reduction for middle-class income earners to try to hide the real ugliness of trying to reduce federal taxes on high income people in a few states. But the middle class folks are happy with a few hundred more per month, as it is a meaningful boost to their income.

And the people who have been racking up tax deductions may be making some tax accountants very high income the next few years. I may need to visit one myself, depending on how badly Connecticut and New York screw the pooch in trying to “fix” things. I am not sanguine re: my chances.