Wednesday, December 27, 2017

The Tax Reform Law: What Is In Store For 2018: Updated

http://www.citylab.com; December 5, 2017


Hello Everyone:

#BloggerCandidateForum may be on vacation until after the New Year but he (it has to be a he) made sure we had plenty to talk about and do we ever have something to talk about.  Onward and upward.

If Mr. Donald Trump can claim any sort of legislative accomplishment, it is the much reviled Tax Reform Bill, which was passed and signed into law last week.  The new law is the first major overhaul of the U.S. tax code since the President Ronald Reagan's administration.  When the U.S. Tax Code was last overhauled in 1986, the legislative process took six months (newyorker.com Dec. 2, 2017; date accessed Dec. 27, 2017) and involved over a dozen public hearings. Not so with this Bill.  No Congressional hearings, last-minute changes scribbled in the margins in the middle of the night, a "late in the midnight hour" vote.  More surprising (not really), few of those who voted in favor of it completely read it through.  Party politics won the day.

Now that that #TaxScam is law Laura Bliss, Alastair Boone, Sarah Holder, Teresa Mathew, and Benjamin Schneider parse out what it all means in their CityLab article "What the Republican Tax Bill Means for Commuters, Renters, and Retirees."  We know who the winners are: corporations and the top one-percent would reap the majority of the benefits.  Who are the losers?  The rest of 99 percent.  The co-authors write, "Most American earning less than $75,000 a year would be worse off by 2027 than they are now,  mainly due to the repeal of the Affordable Care Act's individual mandate" (bloomberg.com; Dec 4, 2017; date accessed Dec. 27, 2017).  The national deficit would increase by over $1 trillion, "triggering automatic cuts to many federal agencies and programs [aarp.org; Nov. 28, 2017; date accessed Dec. 27, 2017] including Medicare, and setting the stage for future showdowns over social safety net programs such as Medicaid and Social Securty."

Aside from the very wealthy Americans, urban dwellers will feel the greatest impact from this newly passed bill.  Some of the most densely populated and wealthiest states like California and New York (no coincidence Blue States), are in line for a bigger increase than before, essential subsidizing cuts to less expensive states like Texas and Florida (citylab.com; Nov. 29, 2017; date accessed Dec. 27, 2017).  Renters could pay a wee less, but the poorest renters could wind up homeless.  For all income bracket, commutes are likely to get worse.  Little wonder why the public reject these proposals by a 2-to-1 margin (theatlantic.com; Nov. 25, 2017; date accessed Dec. 27, 2017).

Now that it is law the co-authors examine what could be in store in the coming year.

"For commuters: bumpier (and bumpier) roads ahead"

Laura Bliss leads off with a look at how the Tax Reform will impact commuters.  The law's most consequential affect will be felt on urban transportation systems and will play out over the long term.  Ms. Bliss writes, "Both the House and Senate proposals cap property tax deductions at $10,000, and completely eliminate deductions for state and local income and sales taxes."  The result would be a reduction in state funding to urban areas, shrink local budgets set aside for road maintenance, bus drivers' salaries, lay new train tracks, and otherwise support Americans' daily commutes.  Streets, freeways, airports, and mass transportation systems are already in bad shape now (citylab.com; Feb. 12, 2015; date accessed Dec. 27, 2017).  So much for paying for that sparkling new transportation infrastructure that Mr. Trump promised on the campaign trail.  In fact, this could make things worse,  "Unless leaders raised local taxes, which would make cities even more expensive places to live, and put the heaviest burden on low-income taxpayers" [Ibid; Jan. 20, 2015; date accessed Dec. 27, 2017].

The Senate version of Tax Reform would have, according to the non-partisan Congressional Budget Office, increased the federal deficit approximately $1.5 trillion over a ten year period (cbo.gov; Nov. 13, 2017; date accessed Dec. 27, 2017).  This would generate cuts to a myriad of federal agencies, including the Department of Transportation, implying less money for highways, airports, and local transit intiatives.  Scott Goldstein, the policy director of Transportation for American, told CityLab,

It's more than just a to bill,...It will have repercussions on programs we rely on to make reinvestment so in American.

With that much debt, it is unimaginable where Congress could find the resources for fabled $1 trillion infrastructure the president bragged about (citylab.com; June 9, 2017; date accessed Dec. 27, 2017).

The news is more grim for infrastructure dreams: "The House...version of the tax bill would eliminate private activity bonds, which allow developers and investors to borrow money at low interest rates for public works projects."  This would make re-paying the loans to build that new rail line or that new airport terminal more expensive and drawn-out.  "Even in cities like Los Angeles and and Seattle, where citizens have already overwhelmingly voted for multi-billion dollar sales tax measures" (Ibid; Nov. 9, 2016;  date accessed Dec. 27, 2017).  Adie Tomer, a fellow at the Brookings Institution Metropolitan Policy Program told CityLab, 

...promises made to taxpayers won't be kept, certainly in terms of timing.

At recent news conference (latimes.com; Nov. 27, 2017; date accessed Dec. 27, 2017), Los Angeles Mayor Eric J. Garcetti (Ibid) offered a more blunt assessment,

This will mean more traffic.

There are parts of the bill that refer directly to transportation, which could have more mixed short-term results.  Tax benefits for buying an electric car would disappear (citylab.com; Nov. 21, 2017; date accessed Dec. 27, 2017), slowing down EV adoption.  Commuter tax benefits were also in danger: the House version of the bil, companies that provide subsidized or free parking or transit passes would no longer be eligible for $255 per-worker tax breaks.  More commuters would have to pay for it themselves.  In an aside Ms. Bliss writes, "For the urbanist crowd a tax policy that eliminates parking subsidies could be considered a tiny win."  The Senate version kept the parking and transit benefit "but a $20 per-month tax available for the tiny-but-growing number who consistently bike to work would disappear."

Why pick on cyclists?  Spite, perhaps (washingtonpost.com; Nov. 25, 2017; date accessed Dec. 27, 2017)

"For homebuyers and owners: cheaper houses, but higher property taxes"

Sarah Holder looks at how the new Tax Reform Law will affect homeowners and buyers.  Both the House and Senate versions put a limit on mortgage interest and property tax deductions, decreasing home values-"as much as 10 percent nation-wide," according to the National Association of Realtors (nar.realtor; Dec. 2, 2017; date accessed Dec. 27, 2017).  It might help prospective buyers, but current homeowners would lose major equity.  Some buyer, upper middle-class in particular, might find buying that new or first home less appealing.

Be that as it may, not every deduction has been completely slashed.  The Senate version kept the $1 million cap for mortgage interest deductions on home loans, but the House version cut it in half.  Ms. Holder writes, "But these changes coincide with the doubling of the standard deduction, [money.cnn.com; Nov. 30, 2017; date accessed Dec. 27, 2017], which essentially cancels out the benefit of any mortgage interest deduction."  The MID has long been detested for preserving saving for the wealthiest Americans, thus reducing it to $500,000 might be little progressive.  However, rather than using the MID savings to pay for new affordable housing, as advocates hope, these saving would gravitate upward (citylab.com; Dec. 4, 2017; date accessed Dec. 27, 2017).

By re-configuring the mix of deductions available homeowners, the new tax law could upend where and when they choose to move.  Both the House and Senate and House versions capped state and local tax deductions, which could drive people away from the coastal states.  "We could see 'tax refugees' [bloomberg.com; Nov. 27, 2017; date accessed Dec. 27, 2017] streaming out of states with high state and local tax states like California and New York."  Further, other changes in the capital gains tax deductions could remove incentives to people from buying or selling.  Lawrence Yun, the chief economist for the National Association of Realtors, told CityLab,

Better jobs, a call to duty by the military-now we are preventing people from taking on these better opportunities.

"For renters: lower housing costs for some; no housing for others"

Benjamin Schneider points out, "How these proposals would affect the 43 million American households that rent their home is not clear."  There is a bit of a Catch-22 to how the new Tax Reform Law will affect housing: "Home values, will almost certainly decrease.  But that doesn't mean necessarily mean rents will start to fall."

The Tax Reform Law does away with home mortgage and property tax deduction-which would explain why property owners in Los Angeles lined up to pre-pay their taxes-thus, more Americans would have littl, if any incentive to buy a home and opt to rent, particularly in expensive cities.  This would more pressure on already tight rental markets, like in Los Angeles, which are experiencing historic levels of demand (washingtonpost.com; June 24, 2015; date access Jan. 2, 2018).  However, the lower home might induce some renters to become buyers.  Hard to say whether or not the drop in prices will out weight the greater tax burden of home ownership.

The big winners are rental property owners.  Mr. Schneider writes, "Under both House and Senate bill, Jim Seida, a professor at Notre Dame's Mendoza College of Business said,

...the owner of a rental property can still deduct the financing costs of purchasing that property, and can still deduct the property taxes without limit-unlike a homeowner"

Additional investment is likely to be funneled toward rental property, possibly leading to lower prices for renters by fueling competition among the builders and property owners.

Even so, as capital makes its way into the traditional rental markets, the affordable rental market will probably take a hard hit.  The big drop in the corporate tax rate "will significantly reduce investor interest in the Low-Income Housing Tax Credit [citylab.com; Dec. 4, 2017; date accessed Jan 2, 2017]."  The accounting and consulting firm Novogradac and Company (novoco.com; Nov. 3, 2017; date accessed Jan 2, 2017) conducted an analysis of the tax reform law, concluding that it would eliminate nearly 1 million affordable rental units.  They found,"...the bills' proposes 20 percent corporate tax rate would make the LIHTC 15 percent less valuable, which would result in $1.2 billion less in investment in affordable housing over the next decade."

The House's bill provision to end private-activity bonds could land an even mightier punch to the affordable rental housing market.  Private-activity bonds are "tax-free municipal bonds" which are primary tool for developers of affordable housing to access the LITHC tax credits and accounts for more than 60 percent (nlihc.org; Nov. 6, 2017; date accessed Jan. 2, 2017) of the construction and and rehabilitation of affordable housing units.  Without this instrument, as many as "880,000 rental units" could not be built or preserved over the next ten years.

Mr. Schneider surmises, "For urbanist, a federal policy pivot toward renters might be seen as a small victory amidst all of the bad news.  But for renters who were already in the most precarious economic position, things are likely to get more difficulty."

"For retirees: rising healthcare costs, Medicare cuts, and shrinking nest eggs"

Teresa Mathew looks at how the Tax Reform Law will impact the elderly.  She begins, "Currently, Americans who spend more than 10 percent of their income on medical expenses can deduct a number of additional expenses-like healthcare premiums and medical transportation costs-from their out-of-pocket health spending."  This deduction made medical care more affordable, considering that long-tern services and support are not usually covered by Medicare and private insurance.  The House version of the tax reform law cut these deduction, but the Senate version saved them.  The American Association of Retired Persons and other advocacy groups releases a joint statement (aarp.org; Nov. 30, 2017; date accessed Jan 2, 2017) expressing serious concern about the cut.

Further, the Senate's version of the law eliminates the mandate requiring all Americans to buy health insurance, premiums healthier younger people would longer subsidize the cost those who require more and more expensive healthcare.  Ms. Mathew reports, "The CBO states that, as a result, average overall premiums for health insurance would rise [thehill.com; Nov. 15, 2017; date accessed Jan 2, 2018] by about 10 percent over the next decade.  A study conducted by AARP's Public Policy Institute found that "there could Abe an average premium increase of up to $1,5000 for people ages 50 to 64 by 2019 (aarp.org; Jan. 2 2018).

Another major concern: the "$1.5 surge to the federal deficit that the CBO anticipates would force automatic cuts to Medicare-up to $25 billion in 2018, and more beyond [Ibid; Nov. 28, 2017]."  Both Medicare and Social Security may be exempt from the mandatory cuts thanks to the 2010 pay-as-you-go law, however as the deficit balloons, many can expect these programs-which prevent millions from falling into poverty- be ripe targets for privatization (thehill.com; Dec. 3, 2017).

For elderly homeowners who are dependent upon their home equity to supplement their retirement income, the pending drop in home values caused by the tax changes would be a hard blow to their long-term economic security.

Workers trying to set aside money for their retirement could also suffer as proposes deductions for pass-through income (cbsnews.com; Nov. 3, 2017; date accessed Jan 2, 2018) might discourage small businesses from offering retirement plans or other related benefits to their employees.  Ms. Mathew writes, "Currently, non-discrimination laws state that if owners are going to have retirement savings plans, they need to create similar ones for their employees."  If a business owner has no incentive to establish one for themselves, they may be less willing to do so for others, and more likely to to set aside money for their own retirements.  This is not good news for workers: "According to a survey from the AARP, 55 million Americans don't have a way to save for retirement out of their paycheck [aarp.org; Oct. 2014]."

Brian Graff, president and CEO of AARP told CityLab,

The data is very clear: People who make between $30,000 to $50,000 are 15 times more likely to save [for retirement] because of the convenience of payroll deduction, the fact there's a match and the culture of savings in the workplace,...If you're left on your own, you don't have those things.

"For students: higher costs for higer ed (especially grad school)"

Alastair Boone returns to take a look at what the new Tax Reform Law means for students considering university, graduate, or professional schools.  The news is not good. Both versions threatened to make higher education less accessible in a number of ways.  The House of Representatives' version had the biggest bite, "with about $65 billion worth of cuts to provisions that help students and families finance undergraduate and graduate programs."  The most eye-popping of these cuts was the tuition waiver for grad students working as teaching or research assistants while earning their doctorates, especially in the STEM subjects.

The tuition waivers differ from stipends-the taxable money provided by the universities to cover living expenses-the waivers are not funds that grad students actually spend.  Thus they are not currently taxable.  However, the House version treated the waivers like taxable income.  During an interview with Inside Higher Ed, University of Illinois Ph.D candidate Mary Grace Hebert compared taxing the waivers to taxing a coupon.  Graduate students would see their tax burden go through the roof, and advanced degrees would out of reach to all but the wealthiest.

There are more tax cuts slated for students.  Ms. Boone writes, "Today, under employer-provided educational assistance, an employer can pay working students up to $5,250, tax free."  The House version of the bill would have eliminated the exempt status for this reimbursements.  Further, the House version offered to repeal student loan interest deduction, "which currently allow those paying off loans to cut their annual tax burden by as much as $2,500 (washingtonpost.com; Dec.2, 2017; date accessed Jan. 2, 2018).  This would further deepened the already growing student debt crisis.

Steven Bloom, the director of government relations at the American Council on Education, told CityLab, 

If you wanted to design policies that undermine eduction for undergraduates, part-time students, folks needing re-training, and graduate students...you would do what the House did,...

The Senate version was more preferable, both versions of the tax reform law eliminate state and local incom and property tax deductions, which translates to fewer funds to pass along to public school districts. Further, fewer funds to public school districts could result in fewer students going to university in the first place (theatlantic.com; Aug. 25, 2016; date accessed Jan. 2, 2018)