Federal Tax Bill Creates Further State Budget Concerns

On December 22nd, 2017, President Trump signed into law the Tax Cuts and Jobs Act, putting in place permanent corporate tax cuts and temporary individual income tax cuts disproportionately benefiting wealthier households. In total, the law will result in a nearly $1.5 trillion increase to the federal deficit over ten years, likely forcing deep federal budgetary cuts in the near future.[i],[ii] Making matters worse, this act could also result in a loss of state revenue, as Montana’s tax code links to changes in the federal law.

Montana lawmakers can and should respond to federal actions to mitigate any loss of revenue to the state. The federal tax bill also injects uncertainty on how taxpayers may respond to the changes, which could also impact state tax decisions and revenue. Furthermore, Montana’s ongoing budgetary crisis and the fact that the federal Tax Cuts and Jobs Act is heavily tilted toward the wealthiest households are reasons for state policymakers to continue to look at tax fairness measures that will ensure adequate revenue to maintain services for communities across our state.

Overview of Federal Tax Law

In general, the federal tax plan puts in place permanent and deep cuts to corporate tax rates, while providing only temporary and modest tax cuts to most individual taxpayers.

Individual Montana Taxpayers Receive Modest Tax Cuts at First, but Tax Hikes in Later Years.

The law temporarily lowers individual incomes tax rates, expands the child tax credit, increases the standard deduction, and scales back several itemized deductions. The bill permanently modifies how tax brackets are adjusted for inflation by using a less generous inflationary rate. This change will result in most people paying more in taxes in later years. The federal savings are used to partly pay for the permanent corporate tax cuts over time.

Factoring in all changes to individual income taxes, in 2025 (when most of the bill’s provisions would be in place), households with income over $1 million would see a tax cut of an average of $25,000. While middle-income households will receive a modest tax cut initially, by 2027, when many of the provisions expire, many middle-income families will be facing a tax increase. Those at the top would still be receiving a tax cut. (see figure on page 1).

Large and Permanent Tax Cuts for Corporations

The federal tax legislation cuts the corporate tax rate from 35 percent to 21 percent starting in 2018. The law also sets a zero tax rate on future foreign profits of multinational corporations. While some provisions are meant to raise taxes, including the elimination of some corporate deductions and expanding what entities are subject to the tax, the overall net impact significantly cuts taxes for corporations.[iii]

Guts the Affordable Care Act Resulting in Increased Health Insurance Premiums for Millions

The law permanently repeals the ACA’s requirement that people get health insurance or pay a penalty. This action will result in 13 million fewer Americans having health insurance. As healthier, younger individuals drop insurance, those with insurance in the marketplace will see their premium costs go up, making coverage out of financial reach.[iv] For a family of four accessing coverage on the marketplace, premiums would increase by $2,100 annually.[v]

Federal Tax Changes Will Affect Montana Tax Laws and Could Negatively Impact State Revenue

In many instances, state tax laws piggyback on the federal tax code, so when federal tax laws change, it can also result in changes to state tax laws. These provisions vary state by state, and some changes could result in increased revenue while others could result in a loss of revenue (see appendix). Factoring in all changes made by the 2017 Tax Cuts and Jobs Act, the Montana Department of Revenue estimates that Montana will see a net loss of state revenue in 2018 and subsequent years (see table).[vi]

Several provisions of the new federal law will significantly lower federal taxes on corporations, and some of these changes will also impact state revenue. The largest tax cut on the federal level comes from a reduction to the federal corporate tax rate, from a graduated income tax with a top rate of 35 percent to a flat 21 percent rate.[vii] This rate change will not affect Montana’s corporate income tax rate.

Congress included several measures to expand the number of businesses that are subject to certain taxes, and these are important changes to both federal and state corporate tax policy. For example, the federal law eliminates the domestic production deduction, which was provided to primarily large corporations for a range of activities, including manufacturing, filmmaking, and publishing.[viii] Montana is one of several states that had not decoupled from this federal deduction, so the elimination of the federal deduction will also result in the elimination of the state deduction.[ix]

However, several other corporate tax changes will result in significant loss in state revenue. The biggest change is the expensing rules for corporations, allowing a business to deduct the total cost of machinery and equipment in addition to certain types of real estate and computer software in the year in which it is placed into service. This is known as “full expensing,” rather than deducting only a portion of the cost each year over the useful life of the purchase, called “depreciation.” The bill also expands similar expensing rules for smaller businesses.[x] In total, these new expensing rules will cost the federal government over $110 billion in lost revenue over the next decade.[xi] Montana law mirrors the federal expensing rules, so this will also result in a loss in state corporate income tax revenue.[xii]

New Federal Deduction for Pass-Through Entities Injects Uncertainty on State Revenue

One measure that has garnered significant attention on both a federal and state level is a new deduction for taxpayers with income from pass-through entities, such as partnerships or limited liability companies (LLCs). A taxpayer that is an owner in a pass-through entity and has income from that pass-through will now receive a deduction on the owner’s individual income tax. The deduction is calculated looking at the pass-through income claimed by the owner.[xiii] The new federal law limits the deduction for higher-income pass-through owners by tying the deduction to a percent of wages paid by, or physical property owned by, the business.

[popout] KEY TERMS BOX:

Taxable income: calculated by first taking a taxpayer’s income and subtracting allowable tax deductions.

Tax credit: a tax benefit that directly reduces a taxpayer’s taxes owed.

Tax deduction: a tax benefit that reduces a taxpayer’s taxable income.

Pass-through entity: a type of business entity that is not taxed at the business level, but instead, the business income is passed through to the owners and taxed on an individual level. Pass-through entities include partnerships, certain corporations with a smaller number of shareholders (S-corporations), and limited liability companies (LLCs).

Partnership: a type of business owned by two or more partners, where profits and losses of the business are divided among and passed through to the partners. [/popout]

While Congress included some sidebars on when this new deduction can be taken, there are significant questions as to whether these changes on a federal level will change taxpayer behavior. For example, some high-income workers may be inclined to shift their status from an “employee” to an “independent contractor”, organized as a pass-through entity, to take advantage of the new deduction. The extent to which this change in behavior may occur is unclear, but potential shifts toward greater pass-through income could impact state revenue collections.

While state officials have indicated the federal deduction will not be applied on the state level, state policymakers can and should take action to ensure this is clear in state law. While an initial analysis by the Montana Department of Revenue indicated that the new federal deduction may also apply on the state level, the Department’s final analysis (and consistent with an analysis of by legislative services) has stated that Montana’s state tax code does not require the state to provide a similar deduction on the state level. However, the governor and legislators should consider policy changes to make it clear that this deduction is not allowed.

Furthermore, policymakers should look at other changes to state tax policy to deal with taxpayer behavioral changes that could increase the pass-through income and therefore decrease state revenue. The Montana Department of Revenue often faces challenges in collecting income tax that is tied to pass-through income due to the complexity of their ownership. In Montana, 381,000 resident and non-resident taxpayers reported ownership of one or more of the 58,240 pass-through entities registered in Montana in 2014.[xiv] Because ownership of a pass-through business can include individuals (both resident and non-resident), other pass-through businesses, and corporations, the complexity of their structures can often present challenges in tax administration and collection.[xv]

For partnership owners, more than three-fourths are non-resident individuals or out-of-state business entities. Nearly all of the Montana income derived from partnerships comes from the wealthiest four percent of partnerships (with incomes in excess of $5 million annually).[xvi] Pass-through entities within the financial sector make up one of the larger sectors (by income level), with more than half of their income (over $35 billion) derived from capital gains.[xvii] Taxpayers with ownership in these businesses benefit from the state capital gains tax credit, which taxes capital gains income at a lower rate than income earned from wages. Thus, many of these entities will now also benefit from an additional federal deduction on the same income. Montana should discuss state policy changes to pare back the capital gains tax credit.

Montana Must Act to Mitigate Loss of Revenue

At a minimum, Montana policymakers should enact proactive state policy changes to hold the state harmless from the direct negative impact of the federal tax bill. As reported by the Montana Department of Revenue, Montana stands to lose over $12 million in state revenue in 2018 and nearly $16 million in 2019.[xviii] The legislature can take steps to limit the loss of revenue, including:

  • Modifying expensing rules for corporations. Many states have already decoupled from federal expensing rules. For example, Idaho requires a business to add back the federally-allowed bonus depreciation in calculating the business’ state taxable income. For purposes of calculating taxable income for a corporation, Montana can and should require corporations to add back the accelerated depreciation for state tax purposes.
  • Maintaining (or even lowering) the current income phase-out levels for itemized deductions. Under prior federal and Montana law, itemized deductions are phased out at higher income levels. Congress eliminated these phase-outs in the federal tax bill. Montana could reinstate or consider lower phase-outs for purposes of itemizing deductions on a state level.
  • Clearly decoupling from the new federal deduction on pass-through income. While this deduction is not allowable on the state level, policymakers could think through state tax changes to ensure this disallowance is clear in law.

The State Should Pass Tax Fairness Measures to Ensure Adequate Revenue

In Montana, the wealthiest 1 percent of taxpayers will receive federal tax cuts averaging in the tens of thousands of dollars annually. Furthermore, as the bill increases the federal deficit by nearly $1.5 trillion, Congress’ second step is likely to cut investments made to states and local governments for health services, infrastructure, and education. States that receive significant federal revenue, like Montana, should find ways to offset these effects. Montana should consider changes to recapture some of the tax windfalls by implementing state tax fairness reforms that ensure adequate revenue, including:

  • Restore a higher top tax bracket for very high incomes (e.g., incomes in excess of $500,000, or the top 1 percent of households);
  • Scale back the state capital gains tax credit for higher income households (for example those with incomes over $1 million per year) or limit the tax credit to sale of in-state assets;
  • Impose a tax on financial institutions with annual incomes in excess of $1 million;
  • Build in a more robust phase-out rate for itemized deduction and cap itemized deductions, impacting the wealthiest 5% of households;
  • Eliminate the corporate net operating loss carryback for non-farm losses (as the federal tax bill eliminates it on a federal level);
  • Eliminate the water’s edge election that benefits large multinational corporations (or alternatively, update the list of tax haven countries); and
  • Adjust the state corporate minimum tax for inflation, which is currently set at $50, and has not been updated since 1965.

Appendix

Federal Tax Change Potential Impact on State Taxable Income
Individual Income Tax
Overall reduction in federal taxes paid Montana provides a state deduction for federal taxes paid, but that deduction is capped. A reduction in federal tax paid will result in a slight reduction to the total state deduction taken.
Eliminate phase-out for itemized deductions Montana links its itemized deduction rules to the federal levels, so some individuals will now be afforded a greater itemized deduction on the state level as well.
Capped federal deduction for state and local taxes paid Montana links its state deduction for property taxes to the federal, so the new cap will impact a very small percentage of taxpayers with property taxes in excess of $10,000 annually.
Eliminate ACA individual mandate Montana imposes a tax on insurance companies for individuals enrolled in the health insurance marketplace. Fewer individuals enrolled in the marketplace will reduce state insurance taxes paid, but this may be offset slightly by individuals required to pay higher premiums on the marketplace.
Corporate Income Tax
Expand business expensing rules by: (1) allowing faster cost recovery under expensing rules; and

(2) expanding the list of property eligible for the expensing

Montana links to the federal business expensing rules, so this will result in faster expensing (and thus lower total taxable income) for state tax purposes as well.
Eliminate federal domestic production deduction for corporations Montana links to the federal domestic production deduction, so this will result in a slight increase to taxable income.
Modify limits on corporate interest expense deduction Montana links to the federal interest expensing rules, so this will result in a slight increase to taxable income.
Shift to “territorial” corporate income tax system Montana currently requires combined worldwide reporting which does not change. However, Montana has not updated its list of tax haven countries for corporate taxpayers electing water’s edge election, and this could result in continued loss of reportable income on profits housed offshore in certain tax haven countries.

 

A Recap of 2017 and the Work Still Ahead

For MBPC, like many of you, 2017 has been a fast-paced, intense year, and 2018 is already looking to be another busy one. As we reflect on this past year and the work ahead, we also want to thank the many Montanans who have supported our work. We have witnessed a state budget crisis, which led to massive cuts in our collective investments in education, health care, and other critical public services. We have weathered repeated federal attacks on the Affordable Care Act. And finally, we recently saw the restructuring of our federal tax code, which will primarily benefit the wealthiest and corporations.

To be sure: we have a lot of work ahead of us in 2018. But while we reflect on the many challenges this past year brought, we also want to reflect on some of the successes we shared together and how we can continue to make progress in 2018.

State Earned Income Tax Credit

We want to start with the positive. After over a decade of work by legislators and advocates, Montana became the 28th state to enact a state Earned Income Tax Credit (EITC). Throughout the session, we heard from working parents who have accessed the federal credit during difficult times. Enacting a state earned income credit is an important step forward to and helping 80,000 low- and moderate-income working families better make ends meet while also making our tax system fairer.

State Budget & Revenue

Without a doubt, our work on the state budget will continue to be challenging in the aftermath of a severe revenue shortfall and deep budget cuts. We are analyzing the real-life impacts of these cuts and also how federal tax cuts may impact state revenue moving forward. Throughout 2018 we will continue to lift up the stories of Montana families hurt by budget cuts, and we intend to return to the 2019 legislative session with revenue proposals to build a stronger state budget.

Affordable Care Act

Congress came close to repealing and replacing the ACA with several bills this past year. All of them would have caused millions to lose health coverage, weakened protections for people with pre-existing conditions, and effectively ended Medicaid expansion to low-income adults over time. Given that seniors, people with disabilities, and children comprise about two-thirds of Medicaid beneficiaries, ACA repeal would have taken away coverage from some of our most vulnerable Montanans. Although we were successful in preventing the repeal of the ACA, the individual mandate repeal in the federal tax plan is a blow to the integrity of the ACA. We must continue to stay diligent defending and strengthening access to affordable health care coverage and stabilizing the marketplace.

Extend Medicaid Expansion in 2019

Looking ahead to 2019, we are working with partner organizations to prevent the repeal of Montana’s successful Medicaid expansion, which has provided health coverage for 86,000 Montanans. Expansion has injected over $700 million in federal funds into our local communities and has saved the state over $30 million in general fund dollars in the first 18 months of enrollment. Hospitals, especially in rural communities that treat higher numbers of low-income patients, are seeing a greater number of patients with insurance and lower uncompensated care costs. Montana’s Medicaid expansion has been a success, and our state legislature will need to ensure this health care coverage for tens of thousands of low-income Montanans is maintained.

The Federal Tax Bill Passed, But It’s Not Over Yet

The federal tax bill is an expensive giveaway to major corporations and wealthy households, which offers little or nothing to most Montana families –and ultimately hurts many. While corporations are gifted permanent tax breaks, the rest of us will actually see our taxes go up in the long run. This tax cut bill increases the deficit by a whopping $1.5 trillion over ten years, and GOP leadership are already aiming for far-reaching budget cuts to food assistance, Medicaid, and college assistance next year that could make it much harder for struggling families to buy food, see a doctor, afford college, or otherwise make ends meet.

In other words, our hardest work to is yet to come.

At MBPC, we believe all Montanans deserve strong, healthy, and safe communities, so we will continue advocating for a sound state budget that prioritizes investments to create opportunity for everyone and ensure our children and grandchildren have a bright future.

Our success would not be possible without the many supporters across the state who recognize the value of this work to lift up the voices of those who are often struggling to get by. There is still time to give in 2017 to make our work even more meaningful in the coming year!

If you believe that we need to invest in this state that we love and invest in our families and communities, please support us in the work we do. 2018 – here we come!

Happy Holidays to the Super Wealthy & Multi-National Corporations…but not the rest of us

President Trump and GOP leadership in Congress got their Christmas wish to have the final tax legislation passed and signed before the holiday break.

But the changes to our tax code, threat to health coverage, and the risk to other safety net programs as a result of this bill were not on the vast majority of Americans’ wish lists. This tax plan is not what working families asked for, and it is certainly will not deliver smart, fair tax policies that support working low- and middle-income folks.

The only ones who are excited to receive their gifts this holiday season are the wealthiest 1 percent and multinational corporations because they get the biggest presents of all, while millions of Americans are handed a lump of coal that ends health care for millions of people, increase taxes on low- and middle-income families, and increases the national deficit.

Regardless of how you celebrate this time of year, there is good reason to be worried.

On the heels of this massive giveaway to the wealthy and corporate interests, many members of Congress have said that they intend to come back next year and seek deep cuts that would likely take away health care, food assistance, and supports for people with disabilities from families that struggle to afford the basics.

At the Montana Budget and Policy Center, we believe that Montanans deserve strong, healthy, and safe communities. To continue to grow Montana’s economy and ensure our children and grandchildren have a bright future, we need to invest in our people. The backbone of this investment is a fair tax structure that provides adequate revenue to properly invest in necessary public services while also preparing for the future demands of an evolving economy and changing demographics.

We opposed this tax bill because it severely limits our ability to invest in our communities. Instead of strengthening our state, it will break the backs of working people and give an extra boost to special interests, the wealthy, and out-of-state corporations. To read about the winners and losers of the final tax bill, go to our blog posted last week.

Winners & Losers of the Final GOP Tax Plan

The final legislative text of the federal tax bill was released Friday, December 15th. The U.S. House and Senate both passed this bill on Tuesday, December 19th, with the House voting again on Wednesday, December 20th to fix procedural errors. It is headed to President Trump’s desk before the end of the week.

All in all, it is nothing more than an expensive giveaway to major corporations and wealthy households that offers little or nothing to most families and ultimately hurts many. It is no surprise that this is the most unpopular tax legislation in three decades.

Here is what the winners – the super wealthy and corporations – get this holiday season:

  • Permanent corporate tax cuts. The biggest tax cut in the bill is the reduction in the corporate income tax rate from 35 percent to 21 percent. The corporate tax cut will mainly benefit those who own shares in American corporations. While some middle-income people own shares, high-income Americans and foreign investors own most. This is the largest one-time rate cut in U.S. history for the nation’s largest companies.
  • Reduction in the top personal income tax rate. The final plan lowers the top tax rate for top earners. Under current law, the highest rate is 39.6 percent for married couples earning over $470,700. The GOP bill would drop that to 37 percent and raise the threshold at which that top rate kicks in, to $500,000 for individuals and $600,000 for married couples. This amounts to a significant tax break for the very wealthy, a departure from repeated claims by Trump and his top officials that the bill would not benefit the rich.
  • Estate tax. Another break that favors the wealthy is the bill’s provision to double the amount of assets that can be left to heirs without triggering the estate tax from $11 million for a married couple to $22 million. Under current law only 0.2 percent of estates are taxed, which means reducing the estate tax can only benefit the very wealthiest families.
  • Pass-through business benefits. The bill includes a 20 percent deduction, with certain limits, for income from pass-through businesses, which are businesses with profits subject to the personal income tax instead of the corporate income tax. Most pass-through income flows to the richest one percent of Americans.
  • No corporate Alternative Minimum Tax (AMT): The final GOP bill gets rid of the corporate AMT, a big relief to the business community.  This is a separate tax calculation, used to make sure that businesses are forced to pay at least a base level of federal taxes and can’t totally avoid taxes by taking various deductions and credits.

Here is what the losers – the rest of us – get:

  • Temporary tax relief with tax hikes down the road. While corporations are gifted permanent tax breaks as outlined above, the rest of us will see our taxes increase in 2027. Eighteen percent of taxpayers who earn less than $69,860 annually will see a tax hike in ten years from now. The tax plan would go into effect in 2018 but the provisions directly affecting families and individuals would all expire after 2025, with the exception of one provision that would raise their taxes.
  • Token increase in the Child Tax Credit. The last-minute changes to the Child Tax Credit (CTC) in the final tax bill do not change the fundamental fact: low-income working families still would largely miss out on the full CTC increase from the current $1,000 per child to $2,000.
  • An imploding individual health insurance market. The health insurance market is almost certain to implode next year, and rates are likely to skyrocket for many, because of the repeal of the individual mandate. The Congressional Budget Office estimates that this change alone will lead to 13 million more uninsured Americans a decade from now.
  • Getting deeper into debt. The final bill costs $1.46 trillion, and there is no realistic scenario in which these tax cuts generate enough economic growth to pay for themselves.
  • Cuts to programs that help families of limited means afford food, housing, health care, and other basic needs. It’s increasingly clear that the tax bill is the first step of a likely two-step plan: pass costly tax cuts for the wealthy and corporations that drive up deficits by $1.4 trillion, then use higher deficits to justify calls for program cuts mainly affecting low- and middle-income families. On the heels of a tax bill that is a giveaway to the wealthy at the expense of everyone else, this would be a one-two punch for working families, children, seniors and people with disabilities.

MBPC Statement: Passage of the GOP Tax Plan Will Harm Montana Families—and Prompts Future Cuts to Critical Programs

Following the passage of the Republican tax bill, the Montana Budget and Policy Center released the following statement:

“The tax plan passed yesterday by House and Senate Republicans is nothing more than an expensive giveaway to major corporations and super wealthy households that offers little or nothing to most families and ultimately hurts many. We are disappointed in Representative Gianforte and Senator Daines who voted for a tax plan that will increase the deficit, end health care for millions of Americans and raise premiums for many more, and stress our state’s resources. With significant federal cuts on the horizon, Montana families are at risk of losing even more because of increased pressure on Montana’s budget that will prompt further cuts to Medicare, social security, our public schools, and public safety.”

What we can expect from this tax bill in Montana:

The wealthiest get the biggest benefits

  • The top 1 percent of taxpayers (with incomes over $552,260) will receive a total tax cut of $28 million in 2027.
  • The average tax cut for the super wealthy in Montana will be $52,550 in 2019.

Low- and middle-income Montanans will see tax increases

  • 18 percent of households earning under $115,020 (which is the bottom 80% of household incomes) will see a tax increase in 2027. That is 87,740 low- and middle-income working Montanans who will be paying more taxes in 2027.

The Child Tax Credit does not do enough for low-income working families

  • A total of 31,000 kids in working families will receive $75 or less in an increase to the Child Tax Credit in 2018.

Health insurance will be far more expensive

  • A family of four will see a $2,100 increase in individual market premiums for health insurance coverage.

The Truth Behind the “Expanded” Child Tax Credit for Montana Families

Meeting behind closed doors, the U.S. Senate and House conference committee reached agreement last week on the final GOP bill to massively overhaul the nation’s tax system. Congress is expected to cast votes on the tax plan today.

The Child Tax Credit (CTC) received a lot of attention last week as last minute changes were made to (almost) meet the demands of Senator Marco Rubio.

With the final bill ready for a vote, it is clear that the last-minute changes to the Child Tax Credit (CTC) that Republican leaders put in their final tax bill do not change the fundamental fact that low-income working families still would largely miss out on the full increase from the current $1,000 per child to $2,000.

In a previous fact sheet, we explained how the Child Tax Credit works. The CTC as it stands is a tax credit that provides up to $1,000 for households with a child 16 years or younger. In 2015, 49,050 Montana families claimed the Additional Child Tax Credit (ACTC), which is the refundable portion of the CTC. This means that if the value of the CTC exceeds the amount of federal income tax a family owes, the family may receive part or all of the difference in the form of a refund check.

The CTC is an effective way to lift children and families out of poverty. This credit frees up additional income that working families need to make ends meet. CTC helps families achieve that goal by supplementing wages when parents’ do not earn enough to meet basic needs, like paying the rent, putting food on the table, and buying diapers or a winter coat for their children.

The final GOP tax bill would increase the maximum Child Tax Credit (CTC) from the current $1,000 to $2,000 per child under age 17 – up from $1,650 in the prior Senate version — with $1,400 of that refundable, but low-income working families would largely miss out on this expansion.

While doing virtually nothing to strengthen the CTC for the lowest-income working families, the plan calls for raising the income level for CTC eligibility, thereby making the credit available to families earning six-figure incomes. Under the final tax plan, filers may claim the full credit to $200,000 for single parents, up from $75,000 today; and to $400,000 for married couples, up from $110,000.

These changes mean:

Under the Senate Republicans’ proposal, more than 30 percent of children in working families in almost every state would receive less than the full increase. The CTC changes in the Senate bill will ultimately benefit higher-income households, whereas single parent or two parent families working minimum wage jobs will receive less of the CTC than they currently do.

At every step in the process, House and Senate Republicans have tilted their tax bills against working families. The conference committee should address these inequities, but instead they dole out even bigger tax cuts for the wealthy and corporations.

Congress must ensure that the 31,000 children in low-income families in Montana receive more than just a token $75 or less from the CTC increase. 

Ultimately, the revisions to the CTC does not change the true winners and losers. Low- and middle-income folks, working families with children, and Montanans with health care needs will not benefit if the GOP’s plan to overhaul our tax system becomes law.

Federal Tax & the State Budget: More Revenue Problems to Come?

As Congress reconciles the differences between the House- and Senate-passed versions of their tax bills this week, here is our next installment of combing through the details of this terrible tax bill.

Both chambers’ tax plans provide large tax cuts to the wealthy and corporations, raise taxes for many low- and moderate-income people, boost the number of uninsured Americans by millions, and expand deficits.

But did you know that the federal tax proposal would also shoot a hole through our Montana state budget?

For today: Federal Tax & the State Budget – More Revenue Problems & Cuts to Come?

Based on the Senate tax bill, the Montana Department of Revenue estimated that the federal tax changes could impact the State General Fund to a tune of $122.5 million per year in 2018 and 2019. The estimated revenue changes as a result of corporate and individual income tax provisions are shocking to say the least.

That $122.5 million per year figure breaks down along four different tax categories:

  • The Senate provisions for individual and pass-through income tax result in $80 million lost in general fund per year.
  • The Senate provisions for corporate income tax result in $13 million lost in general fund per year.
  • The repeal of the ACA’s individual mandate in the Senate bill will result in the loss of $5.5 million in general fund revenue per year. Since it is predicted less Montanans would enroll, the state would lose revenue from no longer collecting the health insurance premium tax from enrollees.
  • The Senate bill could also cause Montana to lose $24.0 million in federal mineral royalty payments each year. This revenue loss would impact Montana counties that depend heavily on coal and oil production.

Just last month the state legislature held a special session to address the budget crisis in our state and find answers to solve the $227 million revenue shortfall on top of $218 million in present law reductions already taken during the regular legislative session and through triggered cuts in SB 261.

Montana cannot weather another hit like this.

Senator Daines and Representative Gianforte should work to advance tax policies that strengthen the state of Montana and invest in our working families. A vote for the federal tax bill would be a vote to send Montana spiraling back into a budget crisis.

 

Pass-Through Provisions Are Not for Main Street

By now you have heard that the tax bill Congressional Republicans are rushing to get to the President’s desk by Christmas will be a costly new giveaway to the very wealthy and major corporations at the expense of working families in Montana.

Last week we outlined who wins and who loses under the U.S. Senate tax plan. Now we want to dive deeper on the details through a blog series over the next several days.

First up: Pass-Through Provisions Are Not for Montana’s Main Street

Racing to pass a tax bill last week, U.S. Senate Republicans made this bad bill even worse by rushing to include a few provisions that skewed the bill even more toward the rich.

One of the last minute edits sweetened the pot for owners of unincorporated businesses who declare their profits as “pass through” income on their personal tax returns — income from businesses such as partnerships, S corporations, and sole proprietorships that owners claim on their individual tax returns and is now taxed at the same rates as wages and salaries.

The version that passed the Senate Finance Committee would have let business owners deduct 17.4 percent of their pass-through income from their taxable income, meaning that it would be tax free (subject to certain restrictions). That deduction is heavily skewed to the most profitable businesses and wealthiest business owners, who receive a greater share of their income from pass-throughs and enjoy a larger tax break per dollar of deductions since they are in higher tax brackets.

To secure the vote of Senator Steve Daines, GOP leadership agreed to raise the deduction percentage by nearly a third, to 23 percent.

Although Senators Daines claimed that he was trying to help owners of small businesses, the fact is that nationally the richest one per cent of households receives more than half of all pass-through income the economy generates.

Because Montana allows all deductions permitted by federal law, the 23 percent deduction to federal income taxes in the passed Senate bill would be taken out again at the state level. According to the Montana Department of Revenue, this pass-through deduction combined with other changes to income tax, would result in a state revenue loss to $80 million.

While sold as a benefit to Main Street, this revised pass-through provision is a sham. As we have explained before, it does not help Montana’s small business owners. It is just one more give-away to the super wealthy in Montana, it increases pressure on Montana’s already strugging budget, and it leaves the average working family high and dry.

US Senate Tax Plan in Montana: Winners and Losers

In mid-November, the House passed a tax plan that would add $1.5 trillion to the federal deficit and increase taxes on working and middle-class people to pay for permanent tax cuts for large corporations and the super wealthy. The proposal also sets up deep cuts to Medicaid, Medicare, education, and SNAP that would add to the pain families feel as a result of this bill.

The Senate bill has the same basic flaws as the House bill, but this time the tax legislation also includes a direct attack on the Affordable Care Act, resulting in millions of Americans losing coverage. As we anticipate the Senate vote this week, let’s take a closer look at who are the real winners and losers in the Senate tax plan:

WINNERS

The Super Wealthy: Despite all of the talk about helping the middle class, wealthy individuals and their heirs win big from the Senate tax plan. The top tax rate for millionaires has been shaved down to 38.5 percent from 39.6 percent, while the exemption from the estate tax—which is a an inheritance tax on multi-million dollar estates—doubles to $11 million for individuals and $22 million for couples. The Senate bill also eliminates the alternative minimum tax (AMT), a levy aimed at ensuring that higher-earning people pay at least some tax.

By 2025 (when most of the Senate bill’s provisions would be in place), high-income households would get the largest tax cuts as a share of after-tax income, on average. Meanwhile households with incomes below $30,000 would, on average, face a tax increase.

Multi-National Corporations: The Senate bill slashes the corporate tax rate from 35 percent to 20 percent, going into effect in 2019. U.S. oil companies with foreign operations would pay reduced taxes under the Senate bill on their income from sales of oil and natural gas abroad. Beer, wine and liquor producers would also reap tax reductions under the Senate measure. Like the House bill, the Senate bill creates a lower corporate tax rate for multinationals’ foreign profits. That’s a big incentive for companies to shift profits and investments offshore to get the lower rate, and it advantages large multinationals compared to small, domestic firms.

The Senate bill makes all these tax cuts for corporations and multinationals permanent—paying for that by repealing the individual mandate and making millions more uninsured, even while allowing provisions that are intended to benefit middle-income families expire at the end of 2025.

Senate tax plan

LOSERS

Montanans with Health Care Needs: The Affordable Care Act’s individual mandate would be repealed, which would cause 13 million more Americans to be uninsured and raise individual market premiums by 10 percent. The individual mandate is critical to keeping individual market coverage affordable and keeping the individual market stable. The $338 billion in savings from repealing the individual mandate are being used to pay for making part of the Senate bill’s corporate tax rate cut permanent, which overwhelmingly benefits high-income households: the top 0.1 percent of households would get an average tax cut of about $100,000 annually.

Working Folks: Many families making less than $30,000 a year would face tax increases starting in 2021 under the Senate bill, according to Congress’ nonpartisan Joint Committee on Taxation. By 2027, when many of its provisions would have expired, those at the top would still get large tax cuts, but every income group below $75,000 would face tax increases, on average.

Working Families with Children: The Senate plan’s signature “middle class” tax cut, its Child Tax Credit (CTC) increase, provides almost no benefit ($75 or less) to 10 million children in low-income working families, and provides less than the full $1,000 increase in the credit to millions more. At the same time, it newly extends the full $2,000 per child credit to couples with incomes between $110,000 and $500,000. Even this meager increase would be temporary, as the Senate tax plan ends the entire CTC increase after 2025. Low-income working adults without children and non-custodial parents are also largely excluded from the plan’s tax cuts, so millions would continue to be taxed into or deeper into poverty.

Charities: Charities that support low-income families and supplement government services are nervous about the impact of doubling the standard deduction. The National Council of Nonprofits warns that charitable deductions are likely to go down under this bill. While the GOP enables the wealthy to continue deducting their charitable giving, many middle- and upper-middle-class families would no longer get that tax break, because they probably would stop itemizing their deductions. At the moment about 30 percent of Americans itemize, but under the GOP bill, the standard deduction roughly doubles from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples, meaning fewer people would probably itemize.

All of us in Montana: About half of Montana’s budget comes from federal funding. If these cuts become law, state policymakers will have to find ways to pay for health care, food aid, grants for college, and more. Thanks to low revenue due to our own trickle-down policies, it is highly unlikely Montana will make up the difference. This tax proposal on top of our current budget crisis in the state will be devastating to our economy, our communities, and our families that are already struggling.

The House Republican Tax Plan: Lion’s Share of Tax Cut Given to Richest 1 Percent of Montana Households, Grows Over Time

Today the US House Ways and Means Committee will begin its work on the House Republican tax cut bill.

House leadership continues to tout this tax proposal as a plan to boost the middle class. Yet a closer look at the bill’s details reveals that it provides an increasing share of tax cuts for the nation’s – and Montana’s – richest households while also increasing the federal deficit by $1.5 trillion over the next decade.

The share of tax cuts to the wealthiest taxpayers in Montana will grow over time due to phase-ins of tax cuts that mostly benefit the rich. The plan also includes the eventual elimination or erosion of tax credits and deductions that benefit low- and middle-income taxpayers.

For example, after five years, the bill eliminates a $300 non-child dependent credit that benefits low- and middle-income families while fully repealing the estate tax that impacts less than 1% of very large estates.

The 10-year outlook for the plan reveals that by 2027, the share of tax cuts given to the wealthiest 1% of households in Montana would grow from 34 percent in 2018 to 49 percent by 2027, for an average yearly tax cut of $50,890.

Middle-income taxpayers’ average tax cut would erode from $600 from $200. In fact, by 2027, one in six Montanans with incomes between $36,000 and $57,000 would actually face a tax hike.

Average Tax Cuts to Top 1% of Montana Taxpayers Dwarf Those Going to All Other Income Groups

Tax Cuts for the Wealthiest Could Result in Deep Cuts to Critical Services for Montanans

Equally problematic to who is benefiting, this tax plan will also result in a massive increase to the federal deficit, that will likely put pressure on federal spending cuts down the line. This budget pressure would then hit our state budget when federal programs get slashed and costs get shifted to the state and local governments. In our state, we know from experience that tax cuts will lead to larger deficits — they will not pay for themselves over the next decade.

Already-struggling families, seniors, and people with disabilities would lose more from cuts to food assistance, health care, housing assistance, and workforce development and educational opportunities than they would gain from the tax cuts outlined in this House bill.

Amidst our current budget crisis, Montana cannot afford additional budget pressure as the result of federal cuts to programs that support low- and middle-income families. Federal funds are the largest funding source for Montana at $4.5 billion or 44.7 percent of the 2019 biennium budget. Our state cannot adequately serve the people of Montana if we see federal support for children, families, and seniors begin to erode as a result of this tax plan skewed heavily to the richest taxpayers.

Our Montana Congressional Delegation should not support any tax bill that is heavily weighted to help the wealthiest, does little to support working Montana families, and swells the budget deficit.