The Republican Tax Dilemma

While a debate on Tax Cutting (don’t let Republicans call it “reform”) may serve useful political purposes such as further exposing the essential hypocrisy of Republican “promises” to their base voters (who will see barely a benefit and will mostly be losers sacrificing their earnings to line the pockets of Plutocrats) and the outright lie of Supply Side Economics (there is no “Trickle Down” or “Job Creation”), it is more likely that what we will see is an increased level of Republican infighting demonstrating their core incompetency at governing and resulting in minor adjustments that will nonetheless be trumpeted (see what I did there?) as grand victories.

Tax Sausage Making Begins, But Will Republicans Be Happy With the Result?
by Yves Smith, Naked Capitalism
September 29, 2017

The big reason the rest of the tax reform bill is likely to disappoint many Republicans is that they not only won’t get anything resembling real cuts, or to use their misleading formulation, “tax stimulus” but that progress on their biggest goal, cutting the statutory corporate tax rate, currently 35%, is likely to be modest.

And here is where Republicans are hoist on their own petard. One of the mechanisms that Republicans have used to weaken government and make it incompetent and unpopular is via deficit scaremongering (mind you, they have plenty of fellow travelers among Democrats). They’ve also incorporated deficit fetishism in Congressional budget rules. Mind you, the appearance of making the number add up is a headfake, since the ginormous military black budget isn’t counted, plus how big the deficit winds up being is due to factors largely outside Congress’ control, meaning how much tax actually gets collected (a function of growth, wages, and employment) and spent (which again varies with the state of the economy).

But on paper, any tax cuts, and a big cut in the statutory tax rate represents a tax cut, have to be matched either by spending cuts or by closing loopholes. With Federal spending at roughly 20% of GDP, the US already spends vastly less than other advanced economies, so there’s not much that could be cut. And on the loophole side, as we’ve discussed, every one has a constituency, so getting rid of some for the supposedly noble purposes of tax simplification and rate reductions will still lead to howling from those whose particular oxen are being gored.

For instance, even some top tax experts had assumed that one of the measures that the Administration has proposed earlier to simplify individual taxes, that of getting rid of the deduction for state and local taxes, would go through because it would hurt blue states and districts. I was skeptical because affluent Republicans in high tax districts would be up in arms. And that backlash has started. Remember, nice homes often come with high property tax bills. Fortunately, anyone looking at a Charleston, SC home for sale will see there are numerous homes available at various price points.

The preoccupation with the deficit plus the size of the constituencies for many of the current tax breaks is what will make any reform underwhelming. For instance, one of the big corporate giveaways is allowing companies to expense capital investments immediately. That would replace depreciation and would be a very costly item in the current budgetary framework. Including that is at odds with the level of rate reduction that the Administration wants.

Trump repeatedly touted a statutory tax rate of 15%. The “framework” presented yesterday promised a reduction to 20% for corporate income and 25% for passthrough entities. We’ve been saying virtually from the outset that was not going to happen, based on tax maven Lee Sheppard’s call that the final rate was going to be more like 29%.

And we have Trumpian mixed signals on other fronts. The president had earlier promised to eliminate the carried interest loophole, which would be a non-concession if hedgies and private equity barons instead could use a 15% passthrough tax rate. Then Treasury Secretary Steve Mnuchin curiously mentioned only getting rid of it only for hedge funds….which don’t use it much since most of their profits are too short-term in nature for them to make use of that tax gimmick. Yesterday, there was nary a mention of the carried interest loophole, leading DealBreaker and others to take notice of the absence.

But what happens if Lee Sheppard is right and all the Republicans can get to is a 29% rate? Will the carried interest loophole be saved despite all the promises to scrap it?

Thanks to the Administration’s refusal or inability to provide Congress with what it expects in the way of a starting point, the wrangling is going to be even messier than usual. Pass the popcorn.

And so it begins-

First GOP tax reform feud erupts over state, local tax break

In the first intraparty showdown to emerge after the plan’s unveiling, Republicans from New Jersey, New York, California and Illinois are among those worried that voters in their districts will face higher taxes than they currently do. They’ve already started making their case to Speaker Paul Ryan (R-Wis.) and Ways and Means Chairman Kevin Brady (R-Texas) – both advocates of ending the deduction – and are vowing to organize to restore their tax benefit.

“I’m going to fight this out and hopefully have success in getting this restored,” said New Jersey Republican Tom MacArthur, a leader of the effort. “I am going to do what I can to rally states like New Jersey and New York, Pennsylvania, California, Illinois, Connecticut.”

Their campaign throws a curveball into tax reform and is already having an effect: Senate Finance Chairman Orrin Hatch (R-Utah) went off script Thursday and said he’d like to maintain the tax deduction if possible. That undercuts the united front GOP leaders wanted to show on the matter – and potentially leaves them a $1 trillion hole in their list of pay-fors, potentially jeopardizing their entire plan.

The tax break is important to taxpayers in states and cities with high property taxes and other levies, most of which vote blue though some are represented by GOP lawmakers like MacArthur. Realtors and others in the housing business also see the tax break as a boost for their industry, given its benefit to home buyers. Property owners who want to know how these tax changes will impact them can talk to a local real estate expert. Anyone in Grand Rapids, Michigan, for example, can find out more here:

Republicans from those states worry about taxes increasing on constituents when they can no longer deduct local levies. Asked if he was a “no” on the tax framework, for instance, MacArthur responded: “I’m certainly a loud objector.”

“It’s not fair to give the entire country a tax break on the backs of the citizens of these six or seven states … the highest-tax states in the country, who by the way get the least back as a percentage of what we pay” to the federal government, he said.

The tax benefit provided $338 billion in deductions in 2015, making it the most widely claimed itemized deduction that year, according to the most recently available IRS statistics. Fully repealing it would raise $1.4 trillion in revenue over a decade, according to an estimate by Alex Brill of the conservative-leaning American Enterprise Institute.

MacArthur has been pressing Ryan and Brady on the issue for weeks and also met with Treasury Secretary Steven Mnuchin and White House economic adviser Gary Cohn, who are also insistent about ending the break, saying it mainly benefits upper-income taxpayers.

Rep. Pete King (R-N.Y.) heard the message loud and clear. During the open mic session at the House Republican tax retreat Wednesday, he warned his colleagues that he could face a backlash at the ballot box should they eliminate the deduction.

King’s centrist Republican district voted for former President Barack Obama twice by 5 points, he told the room. And while Trump won his district last election, it’s only about 35 percent Republican, he said in a brief interview.

“The average person in my district – or the average one who voted for Trump … their only asset is their home, and they’re paying $15,000 in property taxes on average. Probably another $10,000 in [others],” he said.

But some GOP leaders are going on the offensive to try to discredit the state and local deduction. On Fox Business Thursday morning, for instance, House Majority Leader Kevin McCarthy, who is from high-tax California himself, suggested the deduction actually serves as an incentive for states to ramp up taxes – because they know the federal government will “subsidize” hikes by allowing people to write them off their federal tax bills.

“Is it fair that other states subsidize states that have high state taxes?” he asked. “Look at California. California is one of the most mismanaged, highest-tax states in the nation. And they use an argument inside that [state] Capitol, ‘Let’s raise taxes, as you can write it off on your federal income tax.'”

It’s unclear if such arguments will actually convince any opponents of ending the deduction, however. While Rep. Leonard Lance (R-N.J.), who also stood up to voice his objections during the House GOP retreat, wouldn’t commit to voting “no,” he said he’s working in tandem with the others to keep pressing.

“This is a matter of grave importance to me,” Lance said in an interview, labeling it a fairness issue since Garden Staters already pay more in federal taxes than they receive in federal tax benefits.

MacArthur has floated one alternative to create a single homeowner deduction that would let taxpayers pair their property taxes with interest they pay on their mortgages. New Jersey has higher property taxes than any other state.

(O)utside groups representing real estate interests, as well as state and municipal governments, aren’t waiting. They’re already taking up the fight under a single coalition called Americans Against Double Taxation.

The consequence of losing the benefit, they say, would not only hit housing, but also cut into spending on infrastructure, education, public safety and emergency services, and other civic amenities if states and cities are pressured to cut their own taxes as a result of the deduction’s elimination.

And the bloodletting has only started.