The tax reform package making its way through Congress will have a mixed impact on Island residents. The House passed its version on Nov. 16, the Senate in the early hours of Dec. 2. They held no hearings of any consequence. Most senators did not even have time to read the final Senate version at 500 pages before the 2 am vote.
For now, a House/Senate conference committee is working behind closed doors on cleaning up the differences between the two bills. Still, six things are clear.
First, the package has a potential negative impact on the national debt, according to many economists, who say that it would ordinarily rise to $30 trillion by 2027. Now, that figure will increase by an additional $1.5 trillion. Even the congressional Joint Committee on Taxation, which uses a Republican-favored growth formula, estimated the total increase will reach $31 trillion in a decade. Gone is the long-held Republican principle of balanced budgets and fiscal responsibility.
Republicans argue that the reduction in the corporate tax from 35 to 20 percent will lead to greater business investment, higher wages, and more jobs. According to the National Bureau of Economic Research in Cambridge, there is “little evidence that tax cuts boost economic activity.” Corporations are already holding record amounts of cash and not spending it: Bloomberg Markets estimates that amount at $2.3 trillion. And the unemployment rate stands at 4.1 percent, in decline since 2010.
If the debt grows because of little or no growth in the economy, a trigger to increase revenue will come in the 2010 Statutory Pay-As-You-Go Act, colloquially known as Paygo. It automatically cuts some 228 mandatory spending programs, including Medicare and Medicaid, though Social Security is currently exempt. Republicans have long wanted to privatize Medicare and Social Security: This may well be their next agenda item.
Second, both bills eliminate the deduction for state and local taxes, but maintain a property tax deduction for up to $10,000. According to the New York Times, last year some 40 million households deducted $350 billion in state and local taxes, while 38 million did so for $200 billion in property taxes. Most economists have pointed out that this change will mostly affect states along the East and West Coasts, including Massachusetts.
The House bill also reduces the mortgage interest deduction for homeowners with up to $500,000 in loans.
Third, it is difficult to determine with certainty who will receive tax cuts or increases. According to usa.com, a statistics research firm, the median household income of residents in the Martha’s Vineyard School District is $65,800. The median is the number in the middle, so that 50 percent of households are higher, 50 percent lower.
A New York Times survey estimates that about three-quarters of families earning $65,800 will receive a tax cut of about $850 per year, or about $70 per month. Some 11 percent would receive a tax increase. Those in the top 0.1 percent, with incomes over $3.6 million, will see an annual average income tax cut of $85,640, or $7,137 per month.
On Nov. 29, the president said, “This [bill] is going to cost me a fortune, this thing, believe me. This is not good for me.” The Washington Post, however, estimated that Mr. Trump could save between $9 and $16 million a year, because most of his income comes through the 500 pass-through businesses he owns, which requires him to pay personal income taxes on their revenues. Precise figures of how much money he may save are unknown because he has declined to release his income tax returns.
Both bills reduce the tax rate, grant a more generous child credit, and double the standard deduction. In any event, all personal tax cuts expire in 2025 in the Senate version, so taxes will increase for everyone. In the House bill, they do not expire. In any case, both versions make permanent the reduction of the corporate income tax from 35 to 20 percent.
Fourth, a few eliminations. The House bill eliminates the alternative minimum tax for corporations and individuals, but the Senate bill maintains it for corporations.
Teachers and principals who shell out money from their own pockets to help their students with supplies, food, and other things may no longer get a small, though welcome, tax deduction on the first $250 they spend. The House bill eliminates it. The Senate counterpart raises the deduction to the first $500.
In addition, students in graduate and professional school may have to pay taxes on tuition waivers their universities award them. That is part of the House bill.
The Senate bill eradicates the individual mandate embedded in the Affordable Care Act. The House bill does not as yet, but House leaders say they will back the Senate plan. Getting rid of the mandate has long been a Republican goal to repeal Obamacare. The Congressional Budget Office announced that without the mandate, the government would save around $338 billion over 10 years in insurance subsidies for poor people. At the same time, by 2027, 13 million people would lose their health insurance. Those with health insurance may see a 10 percent rise in their premiums beyond expected increases.
At the same time, the House bill eliminates the estate tax entirely, while the Senate version does so partially, raising the minimum tax-free inheritance to $11 million for an individual, $22 million for a couple. If the final version abolishes the estate tax, as President Trump long ago demanded as a candidate, beneficiaries will be the wealthiest Americans. The Trump children — Ivanka, Eric, and Donald Jr. — stand to do quite well.
Fifth, the bills reduce the number of tax categories from seven to four to simplify the process, and double the standard deduction Americans claim when filing their returns. The House bill increases the child tax credit from $1,000 to $1,600 per child; the Senate raises it to $2,000 per child.
Sixth, both versions contain some controversial changes unrelated to taxes. For example, the House bill repeals the 1954 Johnson Amendment, which prohibits religious institutions from advocating political candidates, and the Senate bill opens the Alaska National Wildlife Refuge to oil and gas drilling.
What then is the potential impact of this legislation on Islanders? According to a mid-November Quinnipiac poll, 61 percent of Americans agreed that the proposals enriched the wealthy, not the middle or poorer classes. Fifty-two percent said the reform package would have no impact on jobs or economic growth. Just 25 percent supported the package, and only 16 percent agreed that their taxes would be lower.
This bill is simply politics, not policy. The president and Republicans, who control both houses of Congress, need a major legislative victory. They have not had one since they took office in January. What matters to them is to show their donors they support them as the 2018 election looms on the horizon. What matters to us is whether we understand just what this package is all about, and why Republicans want to push it so quickly to the president’s desk.
Jack Fruchtman, a seasonal Aquinnah resident, teaches constitutional law and politics at Maryland’s Towson University.