The Los Angeles Coalition for the Economy & Jobs – Weekly Update – November 13, 2017
Today the House Ways and Means Committee advanced the Republican tax bill by a 24-16 party-line vote. The move sends the proposal to the full House for consideration next week.
The legislation would slash the corporate tax rate to 20 percent, decrease the number of tax brackets from seven to four and cut rates for all incomes under $1 million.
It would also cap at $10,000 the deduction for state and local income and sales taxes, while keeping a property tax write-off that would be capped at $10,000.
Also today the CA Franchise Tax Board released – SEE ATTACHED – their preliminary look at H.R.1- “Tax Cuts and Job Act” and the potential impact on California residents.
Starting on page 7 of the documents are examples to help illustrate the potential tax impact of H.R. 1 on Californians. The illustrations are based upon federal income taxes and do not account for “other taxes” such as employment taxes, additional taxes on IRAs and net investment taxes.
As you will see the bill will impact California residents differently, but it will definitely increase taxes on some middle-class families – a married couple earning $60,000 would pay an additional $2,586 in taxes – and higher earners who disproportionately support CA’s state budget – a married couple earning approximately $1 million in wages – would pay an additional $17,078 in taxes.
Based upon FTB’s current understanding of the proposal they have also developed a preliminary revenue estimate for the items listed below.
The $10,000 cap on the property tax deduction and the number of Californians that would be affected.
- The 2015 Federal tax year impact of limiting the property tax deduction to $10,000 would result in an estimated federal revenue gain of $1.4 billion. This would impact approximately 560,000 federal returns filed by Californians. This assumes there are no other changes made to federal law.
The elimination of the state income & sales tax deduction (SALT)
- The 2015 Federal tax year impact of eliminating the state & local sales tax deduction (line 5 on Federal Schedule A) would result in an estimated federal revenue gain of $24.3 billion. This would impact approximately 5.8 million federal returns filed by Californians. This assumes there are no other changes made to federal law
The $500,000 cap on the mortgage interest deduction
- FTB is working on the Mortgage Interest Deduction and will provide that information when completed.
To help everyone keep up with this issue I have added a section to the Coalition’s website – https://www.thelacoalition.com/tax-reform/ – to centralize key documents.
There are more than enough Republicans from states with residents who claim the largest average amount of state and local taxes to block efforts to advance the Federal Tax Reform proposal.
An analysis by Bloomberg in September found that there are 52 Republican lawmakers whose constituents benefit disproportionately from the SALT deduction. Concern about scrapping it is one reason the Republican budget outline, which opened the door to tax reform, narrowly passed through the House by four votes. Another reason should be the fact that the Tax Policy Center puts the likely cost of the package at $2.4 trillion.
The budget vote was 216-212, with 20 Republicans* joining Democrats in opposing the measure, 5 members did not vote (3 R and 2 D). Republicans have a majority of 45 in Congress.
*Ken Buck (CO 4th), Matt Gaetz (FL 1st), Lynn Jenkins (KS 2nd), Thomas Massie (KY 4th), Justin Amash (MI 3rd), Frank LoBiondo (NJ 2nd), Tom MacArthur (NJ 3rd), Chris Smith (NJ 4th), Leonard Lance (NJ 7th), Lee Zeldin (NY 1st), Pete King (NY 2nd), Daniel Donovan (NY 11th), John Faso (NY 19th), Elise Stefanik (NY 21st), Claudia Tenney (NY 22nd), John Katko (NY 24th), Walter Jones (NC 3rd), Mark Sanford (SC 1st), John Duncan (TN 2nd)
Eleven of the 20 GOP no votes came from representatives from New York and New Jersey. All 14 members of CA’s Republican Congressional Caucus voted for the bill, even though three have publicly opposed the elimination of SALT.
For now at least three of the eight Republicans representing Southern California in the House of Representatives - Walters, Calvert and Duncan – have spoken positively of the GOP tax reform proposal. And four are holding off judgement – Cook, Rohrabacher, Royce and Knight.
As of Nov. 7, Rep. Darrell Issa (R-Vista) said he can’t vote in favor of the current version of the GOP tax bill. Issa pointed to the elimination of the deduction on state and local taxes as an example, saying that people shouldn’t be taxed twice on the same money.
What Issa and the other undecided members have in common – their constituents have higher incomes and higher home values than the average California resident, which means they would more likely be negatively impacted by the GOP tax bill, and secondly they are vulnerable to losing their seat in Congress in the 2018 election if these constituents abandon them if they vote for passage of the bill next week.
This whole process is eerily similar to what the Southern California’s GOP delegation did when they stayed largely silent on health care until it was time to vote this spring. All 14 of California’s House Republicans voted for a bill to repeal and replace the Affordable Care Act that barely cleared the House, only to die in the Senate.
Senate Republicans’ proposal to rewrite the tax code
was released today and it
breaks significantly with the one crafted by the House GOP, confronting party leaders with dozens of differences to reconcile and little time before the year-end deadline they’ve set to pass it.
House and Senate Republicans are trying to refine and pass their respective bills in the next few weeks, needing to reconcile their differences while operating with slim majorities and working against the backdrop of rough election defeats this week that make some lawmakers more wary of disturbing a restive electorate.
Key Points to Remember
- According to the Tax Foundation, SALT is the most popular itemized deduction: of the approximately 44 million American households (about 30%) that itemized their deductions in 2013, about 43 million deducted what they paid in state and local tax. More than 55% of taxpayers earning over $75,000 a year take the deduction. The deductible state and local tax is just one type of federal assistance, and states that benefit the most from the provision actually rely less on Washington over all.
- In 2015 California residents filed 17.8 million returns and roughly 12 million returns claimed standard deductions totaling $91 billion. Almost 20% of those returns came from districts represented by the 14 members of the CA Republican Congressional Caucus.
- Californians deducted $140 billion in 2015 and $112.5 billion was in state and local taxes, according to the Tax Policy Center. Californians reported almost $53 billion for home mortgage interest and $32 billion for charitable contributions. The remaining deductions were attributed to real estate taxes, personal property taxes and medical expenses that would be eliminated under this proposal.
- Because housing in the state is so costly, the proposal to cut in half the mortgage interest deduction from $1 million to $500,000 would affect some new homebuyers especially in coastal regions. The high cost of housing and related property taxes calculated on housing prices also plays in the reduction of the property tax write off to be capped at $10,000. Many homeowners would exceed that cap.
- This proposal would greatly impact CA’s state budget. Only 70,437 tax filers contributed 40 percent of California’s total personal income tax in 2015. And the PIT covers 70 percent of the revenues the state takes in to fund a now $160B budget. The majority of these filers use deductions. Think about it – what would happen if 25 percent of the 70K high earners decide to pick up and leave CA when their marginal tax rates increase considerably under the Federal Tax proposal.
- A recent WSJ Editorial even called the Federal Tax proposal out of line, referencing a “bubble rate: “The 45.6% is a bubble rate because it applies to tax-filing couples who make between $1.2 million and $1.6 million (above $1 million for single filers). The surcharge is intended to claw back any benefit these filers get from the new 12% income bracket that applies to income of less than $90,000 for couples ($45,000 for single filers). Republicans apparently think it’s unfair for people to pay the same rate on the same dollar of income. So their surcharge applies the 39.6% rate to those first dollars of income for those more affluent taxpayers, which adds about six-percentage-points to the top rate and gets to the 45.6% bubble rate. Add that to the 3.8% ObamaCare surcharge that Republicans are keeping as part of tax reform, and these taxpayers would now have a top marginal rate of 49.4%. Add state and local taxes, which would no longer be deductible against federal taxes (a policy we support), and these mostly Republican voters would in many states pay a marginal rate (on the next dollar of income) close to 60% and an effective rate (total share of income) higher than they do now. Keep in mind this is Republican tax policy.
- Any loss of revenue due to federal changes will drastically impact CA’s budget and the budgets of state and local governments that funds billions in services related to education, transportation, health care, housing, etc. should make everyone take a second look at how the Federal Tax proposal would impact the entire state, i.e its economic growth and productivity and quality of life.
- Finally, the WH and GOP want to pair the president’s pledge to renew critical infrastructure with a shift of responsibility for some of the costs from federally funded grant programs to state and municipal taxpayers. The SALT elimination would SALT elimination would greatly weaken this idea.
Other Overlooked Impacts
Repeal of the Historic Tax Credit
Owners of properties that are listed in or eligible for the National Register of Historic Places may take advantage of a 20% Federal tax credit that has become the most important incentive for historic preservation at a national level. During the past decade, hundreds of California buildings have been rehabilitated with the assistance of tax credits, generating over a half of billion dollars in private investment in the State of California.
The Low-Income Housing Tax Credit plays a role in financing practically all new affordable housing construction in America. According to data provided by the U.S. Department of Housing and Urban Development (HUD), the program produced 2,402,484 low-income housing units between 1986 and 2016. While the House’s tax proposal does include LIHTCs, the unexpected elimination of private-activity bonds would have devastating effects on the construction and preservation of affordable housing. The LIHTC program provides two types of credits for developers willing to put affordable housing units in their projects—the 9-percent credit and the 4-percent credit. The 4-percent credit can only be claimed if 50-percent or more of the project is funded using tax-exempt private-activity bonds. The House tax reform bill, dubbed the Tax Cuts and Jobs Act, proposes eliminating private-activity bonds, so while LIHTCs are explicitly retained in the bill, the elimination of the bonds would eliminate the 4-percent credit and likely lead to a precipitous drop in construction of low-income housing units produced by the program. These bonds contribute to 60-percent or more of the affordable rental housing built or renovated every year.
Repeal of the New Markets Tax Credits
Between 2003 and 2014, $3.39 billion in NMTC investments leveraged an additional $2.73 billion from other sources for a total of $6.12 billion in project financing to 444 projects and businesses in California. Those investments created 48,941 construction jobs and 27,233 permanent, full-time-equivalent jobs. Below are a few California success stories.
Repeal the Alternative Fuels Tax Credit & the Commuter Tax Benefit
This credit is worth approximately $18 million annually to LA Metro and the same bill would weaken the Commuter Tax Benefit, which allows tax-free transportation fringe benefits of up to $255 per month per employee for transit expenses.
Repeal of the Private Activity Bonds & Advance Refunding Bonds
These bonds are a financial tool for State and local governments. Throughout the last five years LA Metro has advanced refunded $313.8 million of bonds for $40.3 million of interest savings. Metro’s board of directors will be seeking board approval to advance refund $65 million of outstanding Proposition C bonds for an estimated interest savings of $8.5 million.