This post is the first in a California Budget & Policy Center series that will discuss the tax cuts proposed by President Trump and Republican congressional leaders and explore the implications for Californians and the nation.
Now that Republican leaders in Washington, DC, have moved on from their latest failed effort to repeal the Affordable Care Act, they have quickly turned their attention to a combination of tax cuts and deep spending reductions that together would have dire implications for many low- and middle-income people in California and across the nation. In September, the Trump Administration and leaders in the US House of Representatives and Senate unveiled their unified tax framework, which would provide significant tax cuts that predominantly benefit the wealthy.
Republican leaders are developing the full details of their tax plan in parallel with efforts to enact a budget for fiscal year 2018, and in order to offset the costs of tax cuts they are also seeking draconian cuts in spending on an array of critical programs and services. Congressional rules allow for a “fast track” process to pass tax cuts and certain spending reductions with a simple majority in the Senate (without needing any Democratic votes) — a process known as “reconciliation.” If GOP leaders pursue their proposed tax cuts, they will enact a massive redistribution of wealth that would be, in part, paid for through budget cuts to programs that help low- and middle-income families make ends meet and access greater economic opportunity.
Latest GOP Tax Plan Skews Benefits to the Wealthy
Despite their stated goal of providing a tax cut for middle-class families, the latest GOP framework would provide the vast majority of its benefits to wealthier Americans and corporations. For instance, the current tax framework is most specific about repealing the estate tax; ending the Alternative Minimum Tax (AMT); cutting corporate tax rates; potentially lowering the highest income tax rates; and preserving tax preferences for mortgage interest — in short, a range of benefits that accrue disproportionately to wealthier households.
In contrast, the tax proposal’s benefits for working families are less explicit — and apparently far less substantial. Based on information released so far, the clearest proposals benefiting middle-class households are a doubling of the standard deduction and an unspecified increase in the Child Tax Credit, though the tax framework also includes some vague language about future “additional measures.” However, accounting for changes like the elimination of personal exemptions and an increase in the bottom marginal income tax rate for some filers, many low- and middle-income families could see little benefit, if any.
Though the President had promised that the rich “will not be gaining at all with this plan,” the numbers tell a different story. In fact, a recent analysis of the GOP tax package points to a vastly unfair distribution of its benefits. According to the nonpartisan Institute on Taxation and Economic Policy, the top 1 percent of households — a group whose annual incomes are at least $615,800 and average over $2 million — would receive over two-thirds of the tax cuts in 2018 (see chart below), an amount equivalent to 4.3 percent of this group’s pre-tax income. The bottom 60 percent of Americans, however, would receive 11.4 percent of the tax cuts, equal to a meager 0.7 percent of this group’s total income. What’s more, these Americans would be most likely to be affected by corresponding federal spending cuts that GOP leaders are proposing to offset the overall cost of the tax cuts.
In other words, the latest GOP tax plan is heavily skewed to benefiting the wealthiest households in the US, likely at the expense of many low- and middle-income households.
The regressive impacts of this tax framework may be even greater in some states. Here in California, an even larger share of the tax cuts — almost 82 percent — would go to just the top 1 percent of earners in 2018, with another 16.6 percent going to the next 4 percent, and the rest of the benefits spread across the remaining income levels (see chart below). The richest 1 percent of California earners — those making more than $864,900 a year — would receive an average tax cut of $90,160. In contrast, middle-income households — making between $47,200 and $75,500 a year — would receive a much smaller average tax cut of $470, and the lowest income households — those making less than $27,300 a year — would receive a tax cut of $120. For many of these low- and middle-income households the benefits of these marginal tax cuts would likely be offset by significant cuts to federal programs and services including health care, housing, food assistance, and job training assistance, among others.
Revenue Losses Would Hurt the Economy and Struggling Households
The latest GOP plan would also come at a huge cost in lost revenues. Estimates of the resulting revenue loss vary from $2.2 trillion to $2.4 trillion over the next decade. While the plan purports to add $1.5 trillion to the federal debt over the next decade, yet-to-emerge details about the plan and likely compromises on some of the plan’s more controversial proposals (such as the elimination of the federal deduction for state and local taxes, widely known as the “SALT” deduction) could result in a much larger increase in federal debt.
The Trump Administration insists that the tax cuts will boost economic growth and pay for themselves, but analysts agree that this scenario is highly unlikely. Rather, in order to minimize the costs of the tax plan, the GOP would likely respond by attempting to further slash entitlement programs like the Supplemental Nutrition Assistance Program (SNAP), Medicaid, Medicare, and other parts of the federal budget that include funding for housing, job training, and other assistance. These cuts would likely have negative impacts on the economy by destabilizing economic conditions of millions of households who rely upon those programs to help make ends meet and to access greater economic opportunity.
Tax Plan Is Particularly Bad for California
The combination of GOP tax and budget proposals would be particularly harmful for many Californians and for the state of California.
In terms of budget cuts, the significant cuts to Medicaid and SNAP (Medi-Cal and CalFresh in California) would likely result in reduced or eliminated benefits for millions of Californians with low incomes — over 13 million (34.2 percent) who are enrolled in Medi-Cal and over 4 million (10.8 percent) who receive food assistance through CalFresh.
These cuts would also likely undermine California’s fiscal health, forcing state leaders to choose between destabilizing the state budget by trying to fill fiscal holes as a result of federal tax and budget cuts or, on the other hand, destabilizing vulnerable individuals and communities across the state by reducing benefits.
Some California taxpayers would also see significant increases in their tax bills. For instance, the majority of Californians earning $129,500 to $303,200 annually — which can actually be considered a “middle class” income in the many parts of California where costs of living are significantly higher than much of the country — would see a nearly $4,000 increase in their annual federal tax bills. This increase is largely the result of the repeal of the SALT deduction, mentioned earlier.
In short, the GOP tax and budget plans would increase the tax bills of some Californians, providing minimal tax cuts for many others, while reducing vital public assistance, all in pursuit of providing large tax cuts to the very wealthiest households and corporations.
A Better Path
Congress can still choose a more fiscally and economically responsible path. Instead of providing tax cuts that overwhelmingly go to the wealthiest households and corporations, cutting vital public programs and services, losing trillions of dollars in revenues, and adding significantly to the federal debt, Congress could seek to enact policies that move our nation in the right direction. Federal tax and budget policies should focus on making investments that enable our communities to thrive, help the most vulnerable, and broaden economic prosperity. Any federal tax cuts should be weighted toward those who need them most, and should be revenue-neutral, with lost revenues from tax cuts offset by other revenue increases (new taxes or closed loopholes) that are fairly distributed across the income spectrum.
It will be important to pay attention to which path our elected officials in Washington choose in the coming weeks and months. Their actions may mean that Californians would face the prospect of holding their congressional representatives accountable for decisions that would disproportionately — and negatively — impact our state.
