Late last year, President Donald Trump promised a Christmas present for Americans in the form of tax reform, and he, along with those in favor of the legislation, managed to deliver. However, regardless of residents accepting or rejecting the revamped plan, there are no returns— and not everybody, namely Democrats, is happy about it.
A majority of politicians have much to say about the GOP tax bill, otherwise known as the Tax Cuts and Jobs Act, that Trump finalized with his signature on Friday, Dec. 22— mostly met with gleeful praise from Republicans about its benefits for corporations, and disparaging remarks from Democrats about the negative impacts on middle- to low-income residents. Nevertheless, local tax and economic experts and elected officials told the Signal Tribune this month that the impacts of the legislation are still unknown.
Richard Auxier, a research associate at the nonpartisan Urban-Brooking Tax Policy Center based in Washington D.C., acknowledged in a phone interview Thursday that the act does provide a tax cut and most people will be paying less in taxes this year, but having various components of the bill only be temporary makes it difficult to assess its impact.
The tax plan came into effect on Jan. 1, but Americans won’t see changes until spring 2019, when they file their taxes for 2018. That means those filing their 2017 income this tax season will be unaffected.
The Tax Policy Center’s analysis determines that, in 2018, 80 percent of Americans will get a tax cut and 5 percent will get an increase. However, Auxier mentioned that every provision related to individual taxes goes away by the end of 2025.
“By the time 2027 rolls around, now the numbers are [that] only 25 percent get a tax cut, while 54 percent get a tax increase,” said Auxier of the policy’s projections nearly a decade from now. “Some have argued, ‘Well, that’s never going to happen.’ And I think that’s a fair argument, in that it probably won’t exactly happen, but something will happen. The answer can’t always be to just continue to extend the tax cuts. This is a $1.5-trillion tax cut, and if you keep extending it, you keep losing revenue. […] I think people are right to say that it can be a tax cut in a few years, but people are also right to say that we don’t know that. But, that’s a big problem that’s being left for Congress to handle.”
The Tax Cuts and Jobs Act is the biggest amendment to the U.S. tax code in more than 30 years, since the Internal Revenue Code of 1986. The GOP bill primarily favors corporations and small businesses. The bill also makes various changes to tax deductions, mortgage rates and healthcare premiums.
Jerome Horton, 3rd-district member of the California State Board of Equalization, said in a phone interview last week that the GOP tax plan is designed to simply redistribute wealthy from one place to the other.
“The question is— and this is my overall philosophy about taxation— that taxation was designed to modify behavior, not to tax the income or tax residents or so forth for the purpose of generating income or distributing income without any motivating factor,” Horton said.
In December, he criticized the bill in an opinion piece, calling the act, which the Congressional Budget Office states would add roughly $1.5 trillion to the national debt in the span of a decade, one that would contribute to financial disparities in the state.
The biggest change for corporations in the bill is the decrease in taxes from 35 percent to 21 percent, which is now a complete turnaround for the United States, having had one of the highest tax rates for big businesses globally to now one of the lowest. The intent was to make the country more competitive and surge the economy over a period of time.
Rep. Alan Lowenthal of California’s 47th congressional district, said in a phone interview last week that the bill reduces the tax rate too far to the other side of the spectrum, adding that the cut imbalances the plan and will have middle-income residents pay the remainder of the cost.
“And we should have looked at how we can become competitive by bringing it down to being among the average rate in the world,” Lowenthal said. “It would have been somewhere between 25 to 29 percent. Instead, we made our rates the lowest and made everyone else pay for the reduction in these tax rates. […] It helped the corporations more than the corporations were asking for. It was just a gift to corporate America.”
The bill will also modify the tax system on businesses in 2019 from a worldwide system, in which the United States is taxed on income earned globally, to a territorial system, in which businesses are mostly taxed on simply their earnings in the country.
Although Democrats are arguing that the corporate tax cuts would only contribute to the deficit, Republicans are arguing that they are necessary to efficiently stimulate the economy.
In December, Kevin McCarthy, the majority leader of the U.S. House of Representatives, told media that Americans will have a plan that “will deliver high wages, lower taxes, a simpler system and a stronger economy.”
The act also provides one of its most significant changes to state and local tax (SALT) deductions, which now has a cap of $10,000. Previously, there was no cap for SALT deductions, which tax experts claimed assisted high-tax states to raise revenue.
The impact of the new limit will mostly be felt by taxpayers who live in high-income areas with valuable property and states with higher tax rates— which includes California.
Auxier said the Tax Policy Center researched that 75 percent of Californians will get a tax cut as a result of the legislation and 9 percent will get an increase.
He explained that Californians pay a federal-income tax and a state-income tax. Residents were able to itemize deductions and tax their deductible income, which would lower federal-taxable income and result in them paying less.
With a new $10,000 cap, there are people who could conceivably pay more in federal taxes because they will no longer be able to deduct some of their state tax.
“I think what a lot of people in California are concerned about is that when you were able to fully deduct the cost of your California taxes on your federal tax, in a way, it kind of lessened the blow of a California tax hike,” he said. “So, if California raised its income tax, those politicians can be able to say, ‘Look, we’re increasing your California state tax, but, remember, you can deduct that from your federal tax.’ […] A lot of California legislators are concerned [if this] will make it difficult to increase or even maintain their current level of state taxation and therefore pay for goods and services.”
Auxier said it’s hard to predict that tax rates will go up solely as a result of the SALT change— there is a multitude of factors. As aforementioned, residents will most likely be seeing an immediate tax cut as a result of the bill, with some changes down the line.
Lowenthal said that his congressional district’s average deduction was about $18,000 to $19,000 in its latest tax season. The congressmember estimated that Californians could lose about $8,000 to $9,000 in deductibles with the new law.
“Next year, when you take away that $8,000 to $9,000, you’re going to see an increase in your taxes of $2,000 to $3,000 immediately,” he said. “[…] An increase right away. So, California is going to pay for the fact that we really invested in our schools and our roads. And, in LA, we voted for infrastructure improvements for our roads. Because we weren’t getting that money from the federal government, people were very generous in the state and voting for those increases, and now they are going to be penalized greatly. Not only does this bill not help the national middle class, it is definitely going to impact Californians.”
The tax legislation also eliminated deductions for casualty losses, which include property lost or damaged in natural disasters, such as earthquakes, floods and, most recently, fires. The new rule also applies to stolen property. Residents can only apply for a deductible if impacted property is in a federally declared disaster area.
Horton said the decision to eliminate the casualty-loss deduction was “just flat-out mean.”
“It creates an environment where there can be a lack of equity in California,” he said. “One could consider a flood in Mississippi a federal-disaster area for political purposes, but a fire in California not to be worthy of a casualty loss. So, that’s what it really created. It really created more politics in the whole ultimate decision. […] Historically, there’s no benefit. They are not saving any money by doing that. That’s why I said it was just political posturing of inequity. It’s like a thumb in the eye of California.”
Horton emphasized that property lost in recent fires in 2017, such as the one impacting Santa Barbara County, are still deductible, and that the new rule is applicable beginning this year.
Another crucial part of the tax legislation was removing the individual mandate that was part of the Affordable Care Act, which means that, beginning in 2019, people will not be legally obligated to buy health insurance or incur a penalty if they don’t.
In November, Mitch McConnell, the Senate majority leader, said, “We’re optimistic that inserting the individual mandate repeal would be helpful.”
Although the Congressional Budget Office also states that eliminating the mandate will save the federal government roughly $300 billion, it will also lead to millions of Americans losing their health insurance while also increasing the premiums of those who do have health care.
“The Republicans are taking this step of eliminating the mandate,” Horton said. “[…] In doing so, that will drive up the cost of the insurance, the premium, because the premium is an overall bill. It is based on having ‘x’ number of people who apply for the policy, and the fewer people who apply for the policy will drive up the premium.”
Horton added that the mandate is still in effect until 2019, so he said residents this year will still have to sign up or pay the extra tax.
Lowenthal said the State has been working hard to provide coverage to all its residents, such as the implementation of the Covered California health exchange, but doing away with the mandate is “a slap in the face to California and to those states that really worked hard to insure all their residents.”
“It’s going to impact the middle-income, working families in this country,” he said. “[…] If you’re the middle class or individuals who have to buy their own insurance, you’re the person who’s going to be impacted by that. And you’re not going to see it right away, but, in a year or two, they are going to start to see their premiums go up. And they’re going to blame it on the Affordable Care Act, when, in fact, it’s really the tax-reform package that is really driving up these rates.”
Other changes to deductibles in the bill are as follows: standard deductions and the child tax credit were nearly doubled; personal exemptions were scrapped completely; and mortgage-interest deductions for new homes were lowered from a total balance of $1 million to $750,000, while interest from home-equity loans will not be eligible for deduction. Student loans are still eligible for deductions under the new tax code, and teachers will still be able to deduct up to $250 for classroom supplies.
Patrick O’Donnell, California’s 70th district assemblymember, expressed his disapproval of the bill’s deduction amendments Wednesday in a phone interview, claiming that the mortgage-interest and SALT changes hurt Californians.
“It’s not reform— it’s a scam,” O’Donnell said. “And that’s what’s unfortunate— Democrats get rid of deficits, and Republicans create them.”
In an opinion piece he published this month, George Runner, vice chair and 1st-district representative of the California State Board of Equalization, said Democratic criticisms of the caps on mortgage-interest deductions and SALT are ironic, claiming that, without such limitations, the tax law would only benefit the wealthy even further.
“Sure, if you can afford to live in an affluent area of the state such as the Bay Area, where the median-home price has skyrocketed above $900,000, there’s a possibility you could be left with a higher tax bill,” he wrote. “However, if you live in poorer areas of the state, such as the Central Valley or an inner city, chances are you probably won’t come close to needing to write off astronomical amounts of mortgage interest.”
The Tax Foundation states that the Tax Cuts and Jobs Act lowers most individual income-tax rates, but most of the changes are temporary and will expire on Dec. 31, 2025. A few tax decreases will be permanent, such as the corporate cut. The foundation projects that, in 2018, the GDP will jump .44 percent, but that the initial spike will gradually dwindle later during the decade as temporary provisions go away.
More projections about the bill can be found at taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/.
Auxier said the Internal Revenue Services (IRS) will need to implement the bill’s changes immediately, also adding that Congress gave it “zero time to figure this out.” However, some adjustments may not be reflected in Californians’ paychecks until sometime next month.
He explained that, under the new rule in 2018, employees on salary-based wages will always get an amount of money withheld to pay federal taxes throughout the year. As a result of adjusting changes, the accurate amount that is being withheld from an employee’s paycheck may not be accurate.
“So, currently, your withholding is probably incorrect,” he said. “And the IRS says that they hope to figure out this new withholding— the accurate amount— by February. This is just really difficult to do, and it’s really difficult to do in real-time. The concern is that it might not be correct when people go to pay their taxes next spring, and their withholding may not have been matched up. That means really big refunds or really big tax bills because the IRS and your employer didn’t have time to figure out how much taxes you are actually supposed to be paying this year.”
Elected officials, such as O’Donnell, believe the tax code did not become any simpler, as some suggested it would, also criticizing the bill’s $1.5-trillion cost.
“We’re passing along a bag of debt to our children,” he said, concluding his thoughts by adding that Republicans are “no longer the party of fiscal responsibility.”
Lowenthal suggested that the only way to back out of the tax plan is in the 2018 election, in which residents will have the opportunity to vote in different elected officials into the House and Senate.
Although local Democrats are sour about the bill, Republicans are convinced the tax plan will win over the American people.
In December, Paul Ryan, speaker of the House of Representatives, told media that, “When people see their withholding improving, when they see the jobs occurring, when they see a simpler tax code, that’s what’s going to produce the results. […] And results are going to be what makes this popular.”
He added, “I think minds are going to change, and I think people are going to change their view on this.”
Auxier’s analysis of the tax legislation is that it is “volatile,” predicting that politicians will have to go back to the drawing board within three to five years because it’s not a permanent change.
“It’s not anywhere close to revenue-neutral,” he said. “[…] This is a $1.5-trillion tax cut. You can’t just deficit finance without repercussions. There’s clearly not a big sweeping desire to make the spending cuts that could possibly offset this. So, I think it’s really hard to project, given how much of it is likely to change over the next couple of years.”
Only time will tell about the lasting impact and legacy the Tax Cuts and Jobs Act will have on the United States.
“We have to have that balance,” Horton said. “Whenever that balance isn’t there, the poor people lose. We have the highest taxes in the nation and the highest poverty, the highest unemployment and the highest wealth disparity in the nation. There’s something wrong with that. It’s just unfair. And the average citizen goes through life doing their best, trying to be productive, fair, equitable people. […] Californians are pretty nice people. And for life to be so tough in California for so many people— we got families, man. They say 78 percent of the folks between 30 and 48 live with their parents. […] It’s tough. We need policies to come together to try to turn that around.”
The Signal Tribune made attempts in the past few weeks to contact California congressmembers Mimi Walters and Dana Rohrabacher to get their input on the tax bill, however Walters’s office did not respond by press time, and Rohrabacher’s office phone number was on an automatic voice messaging system, which stated the congressman intended to vote against the bill in December. Congressmember David Valadao, representing California’s 21st congressional district, was also contacted for comment this week, but his office responded that it could not fulfill an interview request at this time.
