The President’s tax proposals are drawing attention from the media, politicians, and the public. They offer potential for major change, but still lack detail. Tax legislation is complicated, and details ultimately matter. Nevertheless, the early ideas merit a few observations.
The Committee for a Responsible Federal Budget (CRFB) had a short but wise take on them. On the positive side, the tax proposals are a step toward needed simplification of a convoluted tax code. There are huge hidden compliance costs associated with complexity that Americans bear every year in paying attorneys, accountants, and software professionals.
It is also widely recognized that the U.S. needs a lower corporate tax rate to be competitive with other countries―and to stop the exit of American corporate headquarters. Such a move would help “repatriate” corporate profits whose American taxation is being deferred while “abroad.” We also need a tax code that is economically neutral and, therefore, more conducive to economic growth. The American economy is slow-growing; increased growth pays dividends in terms of more job opportunities and government revenue.
On the negative side, the CRFB is justifiably concerned about the tax plan’s impact on U.S. debt, which is already hitting $20 trillion and counting. With Social Security, Medicare, and Medicaid all facing cuts in the next 15 to 20 years and federal borrowing costs climbing, any tax plan has to be real reform that doesn’t balloon the debt and damage the economy.
From a state perspective, the tax package’s proposed loss of the federal deduction for state-local taxes could adversely impact states with high income and property taxes. In both cases, Wisconsin’s are 15 to 20% above the national average.
However, there are other points to keep in mind. First, the proposed doubling of the standard deduction will reduce itemizing, which less than a third of filers now do. Second, significant tax-rate reductions cannot be ignored. The combination of lower rates, a higher standard deduction, and fewer itemized deductions could still mean savings for a number of “typical” taxpayers. Loss of a deduction does not always mean a tax increase.
Critics of the state-local tax deduction ask an important question: Should the federal government and taxpayers across the country subsidize spending in states that have relatively high taxes? In effect, current federal policy encourages states to spend more, with the majority of extra costs falling on state residents, and not on the federal government.
Opponents of the state-local tax break also argue that the IRS code with its deductibility of income and property taxes rewards states for maintaining unbalanced tax systems that overtax income, work, and saving while encouraging wasteful consumption. One recent poll on this subject showed Wisconsin residents were far more favorably disposed to the sales tax than to income and property taxes, even calling it “more fair” than the other two.