Tax Cuts and Jobs Act: Impact

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The new tax law is the most comprehensive set of changes to the US tax code since 1986. It will certainly have a major impact on the finances of the federal government and knock-on effects to all state income tax regimes. It may also have effects on the economic performance of the country as a whole.

This article will try to identify the likely impact of the new tax law the US economy, the federal government and the State of Vermont.

The consensus view of economists is that the new tax law will have a very limited impact on economic growth, if any at all.

The Joint Committee on Taxation, a bi-partisan congressional committee, has forecast that the new tax law will increase the level of GDP by 0.8%, the level of employment by 0.6% and the level of consumer spending by 0.6% over the next 10 years. So, with US GDP at $19.7 trillion now, the growth from the tax law would be only $1.9 trillion spread over ten years.

The US budget deficit was $439 billion in fiscal year 2015, $587 billion in 2016 and $666 billion in 2017. This is all before the new tax law.

According to the Government Accountability Office, the US budget deficit is both “systemic” and “unsustainable”. It’s systemic because federal law requires the federal government to spend more money than the tax code allows it to collect. It’s unsustainable because the amount of federal government debt as a percent of GDP is growing every year and this can’t go on forever.

The Tax Cuts and Jobs Act has taken what is now a systemic and unsustainable budget deficit and made it much worse. The Congress and current administration in Washington passed a major tax cut with no corresponding cuts to spending.

The Congressional Budget Office, another non-partisan congressional office responsible for budget forecasts, has forecast that the new tax law will increase the budget deficit by $1.457 trillion over the next 10 years under their existing 10-year base line forecast. Individual tax cuts create $862 billion of incremental deficit, corporate tax cuts $330 billion and changes to pass-through income tax the remaining $265 billion.

When the base line forecast is adjusted for the modest economic growth noted above, this forecast deficit declines to $1 trillion.

With deficits comes debt, lots of debt. At the end of fiscal year 2016, the US government had $19.7 trillion of debt, EXCLUDING $7.25 trillion of employee retirement pension liabilities. Before the new tax law, the Congressional Budget Office was forecasting that federal government debt would grow by $10 trillion over the next 10 years.

They now estimate that the new tax law will increase this by at least $1 trillion, resulting in $30.7 trillion of debt in 2027.

It’s sometimes difficult to internalize trillions of dollars, so lets try and put this in perspective. At the end of 2016, the federal debt represented $60,800 of debt for every man, women and child in the country. By 2027, this could grow to $94,753. Remember, this EXCLUDES the federal pension deficit.

To summarize, the federal government just passed a major tax cut that will be funded with unprecedented levels of peacetime debt that someone in the future will need to deal with.

Impact on Vermont

Montpelier is very focused on the Tax Cuts and Jobs Act of 2017. The Legislative Counsel and Joint Fiscal Office have already prepared a preliminary assessment of the impact this new law will have on Vermont’s income taxes.

Broadly speaking, the changes to corporate income taxes are not expected to have a material effect on Vermont’s state corporate tax revenues. Many of the major provisions, such as the ability to expense 100% of capital expenditures, don’t flow through to Vermont’s definition of taxable income. So, while a corporation’s federal taxable income may decline, it’s Vermont taxable income remains more or less unchanged.

The big impacts come in the changes to individual income taxes, as follows:

Change in Federal Tax Law Impact on Vermont State Income Tax
Loss of Personal Exemptions Income tax payments will increase more then $25 million
Increase in Standard Deduction Income tax payments will decrease by more than $25 million
Smaller Home Mortgage Interest Deduction Income Tax payments will increase by less than $10 million
$10,000 Cap on State & Local Tax Deduction Income tax payments will increase by less than $10 million
20% Deduction for Pass-Through Entities Minimal impact, but uncertain. Under the Vermont tax code, the 20% deduction for federal tax purposes may not flow through to Vermont taxable income.

Source: “Tax Cuts and Jobs Act of 2017” prepared by Vermont Legislative Council and Joint Fiscal Office

It appears that there is an effort underway in Montpelier to neutralize the impact the new tax law will have on both Vermont taxpayers and tax revenues. The initial assessment is that the changes in the tax law will increase Vermont State tax revenues by $30 million. This is largely due to the loss of the Personal Exemption. The Tax Department is looking at ways to adjust Vermont tax statutes to offset this inadvertent tax increase.

Random Changes and Tax Give Aways

Nothing is straight forward in Washington.  The Tax Cuts and Jobs Act includes a number of provisions that either have nothing to do with taxes or represent specific tax breaks to small special interests.  A few of these provisions are outlined below.

  1. The new tax law permits both exploration and drilling for oil & gas in the Alaska National Wildlife Refuge.
  2. The Individual Mandate, which requires all adults over aged 27 to have health insurance, has been eliminated.  This will motivate healthy individuals to drop their health coverage and drive up the cost of insurance for everyone else. The current administration and its supporters in Congress hope that this provision will reduce the number of people on the Affordable Care Act exchanges and Medicaid and therefore have a corresponding drop in the related federal subsidies paid. Who ends up paying for the health care of the uninsured remains an unanswered question.
  3. Private jet management companies (like NetJets), are now exempt from the 7.5% excise tax payable on all other commercial airline tickets.  Can you believe!!
  4. Excise taxes on beer and wine have been reduced, particularly for small brewers.  This will make quite a few Vermonters very happy.
  5. There is a tax break for citrus growers.  The cost to replant as a result of weather or other natural disasters is now fully tax deductible up front.  The Informed Vermonter couldn’t find a similar provision for maple syrup producers.

So, having passed the new tax law and greatly increased the forecast federal government deficit, Congress passed a bi-partisan budget bill in early February, 2018 that will increase spending by $300 billion over the next two years. That leaves congressman from both parties with a smooth runway to the November mid-term elections, but leaves the rest of us with incremental government debt of $1.3 trillion!

 

 

 

 

 

 

 

 

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