The tax plan proposed by Congressional Republicans includes a decrease of the marginal corporate tax rate and reforms the tax rate for profits made overseas, two things Republicans say will incentivize companies to expand, create new jobs and bring revenue to the federal government, but many of the provisions give little relief to working people.
The Republicans’ tax plan, which has been revised several times since it was put together by President Donald Trump and GOP leaders in September, continues to spark debate over who will benefit from it, as Democrats and New York officials from both parties push back against the proposed elimination of federal deductions on itemized state and local taxes.
The plan — now a reconciliation bill called The Tax Cuts and Jobs Act — which is meant to reduce taxes by $1.5 trillion in 10 years, proposes lowering the marginal corporate tax rate from 35 percent to 20 percent and eliminating certain taxes on profits made overseas.
“The U.S. has among the highest corporate tax rates in the industrialized world. Given the nature of international trade, it is critical that the U.S. become competitive in our tax policy with other nations,” said U.S. Rep. John Faso, R-19. “Reforms contained in this tax reform legislation are intended to eliminate incentives in the current tax code to export jobs overseas. Competitive tax rates will allow U.S. companies to invest more here at home and increase employment; tax reform will also increase job opportunities and take home pay for U.S. workers.”
Faso said Thursday on a conference call with New York chambers of commerce that he expects the House of Representatives’ Ways and Means Committee will provide a final draft of the tax reform legislation by Nov. 16, as the committee continues to mark up the bill and make changes.
“We are just waiting on the Ways and Means Committee and we should see something final by as early as next week,” Faso said. “I have a feeling the Senate bill will be significantly different from the House bill. And as I have heard as of last night the Senate plans to release its plan tomorrow [Friday].”
Faso and his fellow New York Republican Congressional members continue to receive flak from state officials, including Gov. Andrew Cuomo, and Democrats, including Senate Minority Leader Charles Schumer, D-N.Y., for supporting all or parts of the tax reform legislation, calling it a raw deal for middle class New Yorkers.
Schumer has said that the proposed elimination of deductions of itemized state and local income, property and general sales taxes, something both the governor and the senior U.S. senator called double taxation, is just Republican leaders’ way of funding the corporate tax decrease.
“Don’t be fooled — the Republican SALT compromise will still take $1 trillion from the middle class to fund a huge corporate tax cut,” Schumer said Oct. 26, after the House of Representatives passed a resolution that set the stage for the drafting of the current proposed legislation, a resolution Faso voted against.
Faso argued against this characterization of the SALT provision saying only 30 percent of taxpayers in his district file long-form taxes, and he predicts that will be reduced to 8 percent after the elimination takes hold.
“This will mostly affect high-income earners, not middle class New Yorkers,” Faso said. “My concern with this is that it will incentivize these high-income earners who are a source of 80 percent of the state’s income tax revenue to pick up and leave. That would create a real financial problem for the rest of us.”
According to a report released Oct. 26 by the Office of the State Comptroller Thomas DiNapoli, which looked at 2015 tax information from the Internal Revenue Service, found that 31.4 percent of Columbia County taxpayers itemized that year with the average amount deducted per taxpayer at $29,103 and the average total state and local taxes itemized per taxpayer equaling $15,551.
In Greene County 28.9 percent of taxpayers itemized with the average amount deducted being $20,852 and the average total state and local taxes itemized per taxpayer equaling $10,823.The corporate tax rate and repatriation
The proposed corporate tax rate is actually higher than the rate Trump originally proposed, 15 percent, at the end of the summer.
But will the tax break for corporations help the U.S. economy through increased investment and more job opportunities?
Verity Smith, of Hudson, said she does not think decreasing the corporate tax will help the economy.
“Absolutely not — I don’t agree with that [lowering the corporate tax rate],” Smith said. “How will that pay for anything? Corporate tax rates aren’t the way to fix the economy.”
Adrian Masters, a professor of economics at University at Albany, said the reduction in the marginal corporate tax rate could incentivize corporations to expand.
Masters authored a paper in the Journal of Public Economic Theory called “Job creators, job creation and the tax code,” which explores how changes in the tax code determine income dispersion and job creation.
“You do not want to lower the average rate, but lowering the marginal rate while removing certain tax loopholes can incentivize businesses to expand operations,” Masters said. “Let’s say a business is already going to make $1 million. If the business expands it will make an extra $1,000, right now that business will only take home $150 of that extra $1,000. But lowering the marginal tax rate the business could take home $800 out of that extra $1,000, giving it more reason to expand.”
Jeff Friedman, president of the Greene County Chamber of Commerce, said any time there is a reduction in the corporate tax rate it is good for the chamber’s businesses.
“My only concern is how these cuts will be paid for,” Friedman said. “Because increased national debt can negatively affect business, including through capital lending rates.”
Friedman said because Republicans did not address the tax rate on small businesses he does not think the plan will have much effect on Greene County businesses.
“Right now there are not a lot of details about the plan,” Friedman said. “We’re hopeful Congress will release a more detailed plan that we can peruse.”
Masters stressed that the only way the U.S. can afford to lower the marginal tax rate is by closing certain loopholes, “It is the only way to do it without increasing the deficit.”
“Businesses won’t like it, but that is what is best for the economy,” Masters said.
Masters said oil exploration tax loopholes having to do with costs, loopholes that have existed since the early 20th century, would be the most likely holes to be closed.
House Republicans made changes to the tax reform legislation Monday, submitted by U.S. Rep. Kevin Brady, R-Texas, chairman of the House Ways and Means Committee, including an amendment meant to close the carried interest loophole.
The loophole allows hedge fund managers and other investors to file carried interest — compensation hedge fund and private equity partners receive, regardless of how much they personally invested, from profits of any investment — as capital gains, which are taxed at 23.8 percent rather than the 39.3 percent income-tax rate for the highest tier of individual earners.
The amendment would require beneficiaries of the loophole to hold on to assets for three years before qualifying for the lower capital gains tax as a way to find people who pervert the use of the break to avoid individual income tax rates on earnings.
The New York Times reported Tuesday that Democrats were skeptical of the amendment saying it does not address the root problem that hedge fund managers receive capital gains rates for such assets in the first place.
Faso’s spokesman said the congressman is waiting for the House Ways and Means Committee to explain parts of the tax reform bill that would close certain loopholes.
Ricky Lark, of Catskill, said he thinks the tax reform plan benefits the wealthiest Americans more than the middle or lower classes.
“I believe the tax code needs to be simplified,” Lark said. “But this version of that is benefiting too many of the one-percenters.”
Brady’s amendments also include increased oversight of the earned-income tax credit used by low and middle class earners based on income and family size.
The tax reform legislation would also create a one-time lower tax rate, from 35 percent to 12 percent, on repatriated assets — profits U.S.-based companies make overseas — to create incentive for companies to bring trillions of dollars they have kept abroad back to the country.
“Current tax law also penalizes U.S. companies doing business overseas by subjecting foreign profits to double taxation — once where the product is sold abroad and then again if that profit is brought back to the U.S.,” Faso said. “Double taxation of foreign earned profits is a major reason why U.S. companies have stashed approximately $3 trillion overseas. Repatriation of these profits, at incentivize rates, will increase federal revenue. Going forward, these profits can be brought home without the risk of double taxation as the U.S. shifts — like our foreign competitors — to a territorial tax system.”
Masters said lowering taxes for repatriated profits has the potential to increase the federal government’s revenue stream.
“Right now no tax revenue is coming in from profits earned overseas because corporations leave those profits overseas,” Masters said. “So if you lower the overseas rate you might collect more taxes because money that was not coming over before will be coming in and could be taxed.”employee-related and other provisions
The tax reform legislation consolidates certain tax brackets and increases the standard deduction, while also repealing certain other deductions that benefit working people.
There are seven individual income tax brackets: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6.
The House tax reform proposal would consolidate those tax brackets to 12 percent, 25 percent, 35 percent and 39.6 percent.
House Republicans are also proposing increasing the standard deductions from $6,350 for single individuals and married individuals filing separate returns, $9,350 for heads of households and $12,700 for married individuals filing a joint return in 2017 to $24,000 for joint filers, $12,000 for individual filers and $18,000 for single filers with at least one qualifying child.
The State Comptroller’s October report found that the combined standard deduction and personal exemptions for married couples without children totals $20,800, a figure House Republicans propose increasing by $3,200 — 15 percent — and for single filers the increase on the combined return would be $1,650 — 15 percent.
“While such changes would benefit certain taxpayers, they reflect much smaller savings than what has been described under the [tax plan] as “roughly doubling” the standard deduction,” the report asserts.
House Republicans cite the increase in the standard deduction as a reason for the repeal of several other specific deductions including deductions on employee expenses and if a taxpayer moves for employment purposes.
First and foremost the plan would eliminate deductions on personal exemptions — $4,050 for each dependent aged 24 and under — a provision Republicans justify citing the higher standard deduction.
According to a 2015 Comptroller’s report, New Yorkers claimed more than $5 million in dependent exemptions.
“The personal exemption applies to all taxpayers, whether they claim the standard deduction or itemize deductions,” according to the report. “With the proposed consolidation of the personal exemption into the standard deduction, taxpayers who itemize would lose the benefit of the personal exemption unless final legislation specifically provides for its retention.”
Taxpayers may claim expenses relating to the trade or business of being an employee only if they itemize deductions, and certain expenses can be claimed before a taxpayer’s adjusted gross income is calculated — called above-the-line deductions — including certain expenses of performing artists, state and local government officials, elementary and secondary school teachers and reserve members of the military.
The proposed tax reform would repeal all these deductions except those afforded to reserve military members.
Under current law taxpayers can itemize moving expenses related to starting a new job as long as the new workplace is at least 50 miles farther from the former residence than the former place of work, a provision the tax reform bill proposes to repeal.
Taxpayers are also able to deduct certain out-of-pocket medical expenses that exceed 10 percent of the taxpayer’s adjusted gross income — another deduction the House plan proposes repealing.
“This represents a small percentage of taxpayers, but I don’t agree with this provision,” Faso said.
Jeff Hunt, president of the Columbia County Chamber of Commerce, said the chamber is not focusing its attention on the corporate tax rate, but is concerned about the proposed elimination of the state and local tax deductions, as well as a proposed cap on mortgage interest deductions at $500,000.
“With the second homeowner market in the county, a lot of the houses costing well over $500,000, those people will only be able to write off the first $500,000 of their mortgages,” Hunt said.
Faso said he opposes the cap on mortgage interest deductions and said he expects the Senate will have a completely different proposal on the issue.
“All existing mortgages will be grandfathered in, though,” Faso said. “This is only for future mortgages.”