Democrats Cash In on Tax Reform
Democratic governors have lambasted the GOP tax reform as “evil in the extreme,” to quote the moral stylings of California Governor Jerry Brown. But that isn’t stopping them from cashing in on the tax law.
Many liberal states have reported unexpected revenue surges. Tax revenues in California this year are $3.8 billion higher than the governor’s forecasts. New York’s Comptroller reported last month that tax collections have surpassed the state’s February forecast by $315 million. Even Connecticut raked in $1.3 billion more than its pie-in-the-sky projections.
Corporate tax revenues are booming thanks to growing profits and, though it’s still early, businesses repatriating billions in foreign income. The GOP tax bill imposes a one-time tax on overseas cash and allows future profits to be repatriated tax free. According to California’s Legislative Analyst Office, eliminating the incentive to stash cash abroad will increase revenues “on a one-time basis by a few hundred million dollars over the next two to three years” and permanently boost state coffers by tens of millions of dollars annually. Note also that the dividends corporations are paying to shareholders will be taxed by states, as will capital gains that result from stock buybacks.
The Trump Administration’s deregulation and tax reform have unleashed animal spirits, which has increased stock values and capital gains. These revenues are volatile, but the serendipitous surge was a godsend for Connecticut. Without the revenue spike, the state would have hit its debt limit and may have had to cancel school construction projects.
Some states are also double-dipping on tax reform’s base-broadening measures. Nearly all states incorporate provisions of federal tax law to varying degrees. Six use federal taxable income—which excludes personal exemptions and itemized deductions—as their baseline when calculating an individual’s liability. Most link some of their deductions and credits to the federal code.
Because the GOP tax reform reduced many deductions, more income may be taxed at the state level. According to the California Franchise Tax Board, the state-and-local tax deduction limit will produce an additional $550 million in state revenue this year. New York estimated a $400 million revenue increase from the state-and-local tax deduction limit. After high-earners howled, New York decoupled its deductions from the federal code to prevent a tax hike.
But Colorado is expecting a $197 million windfall from changes in federal tax law, which it plans to pump into schools. Minnesota has projected a $416 million dividend. Democratic Gov. Mark Dayton this week vetoed a bill passed by the GOP legislature to prevent a tax hike on state residents.
Remember how Democratic governors wailed that the limit on the state-and-local tax deduction would slam their taxpayers? Yet many are now happy to pocket an incidental increase in state tax revenues. They can soak their rich without actually raising taxes.
Democratic governors are worried that the deduction cap could drive out high-earners by raising their federal tax burden. But then why not cut their tax rates? Idaho’s Tax Commission estimated that conforming with the new tax law would increase state revenue by $97 million. Idaho lawmakers responded by reducing the corporate and individual income tax rates by 0.475 percentage points across the board. Republicans in Georgia cut their top individual and corporate tax rates to 5.5% from 6% by 2020.
Rather than invent convoluted schemes to reduce their taxpayers’ federal tax burden, Democrats ought to cut their own.
Appeared in the May 26, 2018, print edition.