Earlier this month, the US Senate passed its version of a Republican tax bill that would give large tax breaks to wealthy households and major corporations and add $1.5 trillion to the federal deficit over the next decade. This Senate action follows passage of a similar GOP tax bill by the House of Representatives in mid-November. A conference committee made up of members from both chambers of Congress is now working to resolve differences between the two bills, with the goal of advancing a final bill to the House and Senate floors for final votes by mid-December and, in turn, sending completed legislation to President Trump for signature before Christmas. This means that California’s congressional delegation — most notably 14 House Republicans, 11 of whom last month voted in favor of the House bill — will have one more opportunity in the coming weeks to weigh in on the tax plan. This blog post examines what is at stake for residents of our state.
What would the GOP tax plan mean for Californians? While there are some notable differences between the House and Senate bills (as this helpful side-by-side comparison shows), they share two critical underlying problems: First, both bills include tax cuts that predominantly favor wealthy households and large corporations. And second, both bills essentially call for these tax breaks to be paid for over time by middle- and low-income households, who not only receive little in the way of tax benefits — and may even see their taxes increase — but also are the ones most likely to be harmed by the loss of vital services resulting from federal spending reductions made necessary by the tax cuts. The GOP tax bills also would shift a large financial burden to future generations, who would bear the brunt of the effects of adding $1.5 trillion (and likely more) to the federal deficit. California would be hit particularly hard by the GOP tax plan, which would reduce certain tax benefits for middle- and low-income families and individuals, imperil vital services that help advance the well-being of many of these same people, and strike at the fiscal health of California’s state and local governments.
The following sections of this post examine major provisions of the GOP tax bills and their implications for California and our nation.
The GOP Tax Bills Are Overwhelmingly Tilted Toward Wealthy Households and Major Corporations
Although GOP leaders describe their tax plan as “middle-class tax cuts,” the evidence shows that the tax cuts are predominantly targeted to the wealthy and corporations. The bills’ key provisions include:
- Cutting the corporate tax rate to 20 percent, down from its current rate of 35 percent.
- Allowing so-called “pass-through businesses” — partnerships, S-corporations, and sole proprietorships — to shelter up to 23 percent of their business income from federal taxation.
- Allowing larger corporations that have been sheltering profits outside of the US to “repatriate” those profits at a significantly reduced tax rate.
- Nearly doubling the federal estate tax exemption from estate values of $5.6 million for individuals ($11.2 million for couples) to $11 million for individuals ($22 million for couples). The House bill would go even further, repealing the estate tax entirely in 2024.
- Repealing the Alternative Minimum Tax, which ensures that well-to-do households who can write off much of their tax bills — through deductions, exemptions, and credits — still pay a minimum level of federal taxes each year.
In addition, the Senate bill would make the corporate tax cuts permanent, while most tax cuts for households would expire after just the next few years. An analysis of the Senate tax bill by the Institute on Taxation and Economic Policy (ITEP) reveals that by 2027, the richest 1 percent of households in California would receive an average tax cut of $14,010 a year, while California households with incomes in the bottom 60 percent would on average face a tax increase. Under the House bill, the richest 1 percent of California households would fare even better, receiving an average annual tax cut of $20,770 by 2027.
The GOP Tax Cuts Would Largely Be Paid for by Middle- and Low-Income Households
The key findings from ITEP’s distributional analysis of the GOP tax bills are corroborated by both the bipartisan Joint Committee on Taxation (JCT) and the Congressional Budget Office (CBO), whose analyses (see chart below) show that the GOP tax plan treats middle- and low-income Americans as an afterthought at best — providing them with little or no tax benefits and, in fact, raising taxes for many of these households over the next decade.
But, the House and Senate bills’ effects on taxes alone are just one part of the story. These effects are closely linked to the GOP tax plan’s implications for federal spending on a wide range of vital services and supports that improve the lives of middle- and low-income families and strengthen the underpinnings of our nation’s economy. The budget resolution passed by Congress earlier this fall — which laid the path for the GOP tax bills — assumes $5.8 trillion in federal spending cuts over the next 10 years. These include $1.8 trillion in cuts to Medicaid, Affordable Care Act (ACA) subsidies for families’ health premiums, and Medicare, along with $2.3 trillion in cuts to income security programs (federal food assistance through SNAP, SSI, welfare-to-work, etc.) and education (Pell grants, student loans). Republican Congressional leaders have already signaled their interest in advancing specific proposals, as soon as next month, for making sizeable reductions in these areas.
For many middle- and low-income families, the loss of key public supports, such as health care benefits, food assistance, and education funding, would far outweigh what little — if any — benefits they receive from the proposed tax cuts or would add to the pain of their higher taxes.
The GOP Tax Bills Heavily Burden Future Generations by Exploding the Deficit and Forcing Future Spending Reductions
Under the rules that congressional Republicans have established in order to enable “fast track” approval of their tax plan, the final legislation can add as much as $1.5 trillion to the federal deficit over the next 10 years. But in order to stay below this limit, they have crafted bills so that many of the provisions that might benefit individual households would actually expire (while most of the corporate tax cuts would be permanent) or be capped or restricted in some fashion to limit eligibility. Even so, some GOP leaders have said publicly that the expiring tax cuts ultimately will be extended, which would push the actual impact on the federal deficit well above the $1.5 trillion threshold.
The burden of paying the long-term costs of the GOP tax bills will largely fall on future generations, through significant reductions in essential publicly funded services and/or through the higher taxes that would be needed to offset some of the tax cuts and maintain these services. In short, the GOP tax plan rests on a two-step strategy that consists of (1) cutting taxes for the wealthy now, thereby exploding the federal deficit, and then (2) using the growing deficit to justify cuts in vital programs for everyone else — both immediately and over the long term.
Key Elements of the GOP Tax Bills Would Be Especially Bad for California
The provisions of the GOP tax plan purposefully and particularly would negatively affect California in a number of ways.
- Scaling back the state and local tax (SALT) deduction. This deduction allows households to deduct, when figuring their federal taxes, what they pay in state and local property taxes as well as either income or sales taxes. As we have discussed before, the SALT deduction is an important federal provision for California. The House and Senate tax bills both would repeal the federal deduction for state and local income and sales taxes, while capping the property tax deduction at $10,000 annually. Residents of states with higher state and local taxes — like California — receive larger SALT deductions, and the GOP tax plan would hit taxpayers in these states particularly hard. Consider also that more than one-third (34 percent) of California tax returns claimed the SALT deduction in 2015, according to a Center on Budget and Policy Priorities (CBPP) analysis of IRS tax data. Of the deductions received, nearly three-quarters (72 percent) came from the income/sales tax deduction. A number of California congressional districts with GOP representatives have high percentages of households that claim the SALT deduction, including the districts of Representatives Mimi Walters (45th District), Tom McClintock (4th District), Dana Rohrabacher (48th District), Darrell Issa (49th District), Ken Calvert (42nd District), Steve Knight (25th District), and Ed Royce (39th District).
- Capping the Mortgage Interest Deduction (MID). The House tax bill would cap the Mortgage Interest Deduction (MID) at a mortgage debt level of $500,000. This would mean higher tax bills for future homebuyers in regions with higher housing costs, where mortgages are more likely to exceed this $500,000 cap. The potential impact on California families is enormous. Our state is home to 5 of the top 10 metropolitan areas in the US in terms of share of homes valued over $500,000: San Jose, San Francisco, Los Angeles-Long Beach-Anaheim, San Diego, and Sacramento. It’s also worth noting that a number of California congressional districts with GOP representatives have high percentages of households with mortgages over $500,000, including the districts of Representatives Dana Rohrabacher (48th District), Mimi Walters (45th District), Darrell Issa (49th District), and Ed Royce (39th District).
- Repealing the individual mandate in the ACA. One of the more striking parts of the Senate tax bill is that it would repeal the “individual mandate” in the ACA, which requires most people to have health insurance or pay a penalty. Ending the mandate would mean that some people who are less likely to opt in for health insurance — usually younger and healthier individuals — would no longer obtain coverage. This would lead to higher premiums for those still covered, because a smaller share of healthier people would be paying into the system. The combination of people leaving the system and less affordable premiums could significantly increase the number of people who lack health insurance. California has made significant health coverage gains in recent years through its robust implementation of the ACA, reducing the state uninsured rate from 18.5 percent to 7.3 percent from 2010 to 2016. Repealing the individual mandate would likely halt this progress and could — over time — reverse California’s considerable coverage gains.
Federal Budget Cuts Would Harm Low-Income Californians While Putting Significant Pressure on the State Budget
The federal budget cuts outlined in GOP budget and tax plans would disproportionately and negatively affect low-income Californians and the state’s fiscal health. Federal cuts to health and human services — Medicaid, SNAP food assistance, SSI, and the TANF welfare-to-work program, which together provide income security and other support to low-income families and individuals, would hit more people in California as a result of our state’s high level of poverty and the various economic challenges facing the state’s residents. Also, these federal services and supports are delivered in concert with state governments, such that federal spending reductions would force California state policymakers to choose between either maintaining eligibility and service levels for low-income populations at significantly higher state costs or reducing eligibility and/or services in response to lost federal funds.
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Regardless of how the conference committee resolves the differences between the House and Senate tax bills, the GOP tax plan amounts to windfall gains for wealthy households and major corporations, paid for by middle- and low-income taxpayers and by future generations. Both the House and Senate will ultimately have to approve a final tax bill in the days ahead. This means that the 14 members of California’s GOP House delegation have one more opportunity to halt a tax plan that, for the reasons outlined above, is a bad deal for their home state and their own constituents.
— Chris Hoene