Since the Tax Cuts and Jobs Act became law in 2017, government officials in high-tax states have been frantically trying to find a way to overturn the provision that limits taxpayers’ deduction for state and local taxes to $10,000. That limit makes taxpayers in high-tax jurisdictions feel the impact of their local governments’ tax-and-spend policies more keenly, and those governments will do anything (short of actually cutting taxes) to prevent that from happening.
First they resorted to weird workarounds that will surely be ignored by the Internal Revenue Service and struck down by the courts as the ruses that they are. Then they sued in federal court to stop Congress from changing the tax law. The lawsuit is without merit—it’s so bad, even California declined to join it.
Now at least one state, Connecticut, is considering radically reordering its tax system in a way that will be objectively worse for its citizens, all to spite the federal government. Sooner or later, these tricks will be used up and the high-taxing states will have to face reality.
Any analysis of the federal income-taxing power must begin with the Sixteenth Amendment to the Constitution, which is brief but sweeping: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” While Article I always gave Congress the power to impose direct taxes, the Sixteenth Amendment removed the constitutional restrictions on that power that made its exercise practically impossible.
That power, with the pre-1916 restrictions removed, is as broad as it gets. If you have income, the federal government can tax it. From the beginning, courts have recognized the sweeping nature of the Sixteenth Amendment and, in 1955, clarified further just how broad the amendment is in the landmark case of Commissioner v. Glenshaw Glass Co. In that case, the upheld the Internal Revenue Code’s definition of income as being truly “all-inclusive.”
To admit this does not require an endorsement of high taxes, or indeed of any taxes at all. To say that the government can tax all income does not mean you think they shouldtax all income. It is only to admit a fact that, until recently, Democrats were especially fond of acknowledging: the government has the power to tax your income.
Admitting that also does not mean that the government must tax all income. We have never had a truly flat tax. The 1916 Revenue Act, for example, allowed a deduction for foreign taxes as well as state and local taxes (commonly abbreviated as SALT). It also contained deductions for depreciation, depletion, and interest that are similar to those still in the code.
But none of these deductions were a matter of right; they were legislative choices, undertaken to reduce the burden of taxation in ways that Congress thought made the income tax fairer. That’s a fine idea, but it does not create an inalienable right to that tax deduction.
Connecticut’s plan to beat the system is clever—too clever, really. Jared Walczak of the Tax Foundation explained the details in a recent article: “the state’s graduated-rate income tax would be largely replaced by a 5 percent payroll tax, plus an additional 2 percent tax on income above $200,000, which would raise more money than the current income tax. The state’s Earned Income Tax Credit (EITC) would be increased to offset the higher tax liability for low-income earners, and because the payroll tax is a deductible expense for businesses, taxpayers subject to the $10,000 [SALT] deduction cap would get a federal tax cut even as the state generates more money.”
Walczak’s article points out the main problems with the complicated proposed tax structure. Getting the thing to work at all without creating bizarre incentives is a problem. For example, a payroll tax with multiple brackets will inevitably require massive end-of-year adjustments for anyone working multiple jobs. It also results in a different tax structure for wage workers and independent contractors, as well as people who live off investments.
Does the Nutmeg State really want to shift the tax burden away from one group of people based purely on the terms of their employment? If so, regular jobs are going to shift to other states and freelancers are going to move in, creating a hole in the state budget. The idle rich will come out ahead, too, as their non-wage income becomes non-taxed.
That’s a strange thing for a supposedly liberal state to do, but ordinary concerns fly out the window when the overriding goal of thwarting the president enters the equation. Democrats have made a cottage industry out of saying richer people need to pay more taxes. When that becomes slightly true because of a Republican initiative, however, all of the well-heeled blue staters want to use corporations to hide income from the federal government.
The pending case of New York v. Mnuchin, to which Connecticut is also a party, makes even less sense. The attorneys general of these four high-tax states suggest that the federal taxing power was never intended to interfere with the states’ taxing power. There is no citation for this point, which tells you about all you need to know: the claim is invented out of thin air.
The idea that the reduced SALT deduction impairs the states’ taxing power is also nonsensical; the states retain the power to tax, they just can’t use a federal deduction to hide how high their taxes are. As Joseph Bishop-Henchman wrote for the Tax Foundation, “Tax deductions and carve-outs are a matter of legislative grace.”
Even the idea that federal taxation must exempt all state taxes is unsupported by history. Bishop-Henchman cites several instances when the deduction was limited, including in 1964, 1969, 1986, and 1993. And from the start, federal tax never completely excluded state and local taxes: it was a deduction, not a credit. While taxpayers did not pay taxes on the portion of their income that they paid to their state, they did not get a full credit for that amount, either. The deduction only saves the marginal rate on the income devoted to state taxes—the fraction of the fraction.
The complainants say that “at ratification, it was widely understood that the federalism principles enshrined in the Constitution would serve as a check on the federal government’s tax power.” That’s true, but not in the way they think it is.
Federalism did result in informal limits on federal power, but only because the states, represented in the Senate, kept the federal government from fully exercising its powers at their expense. If those limits have been eroded in the past century, it is because progressives went out of their way to erode them, first by requiring the direct election of senators and later by appointing judges who allowed them to ignore all limits on federal power, written and unwritten.
These same progressives now want you to believe that one of those unwritten, informal restrictions must override the law. The change of heart is cynical, if predictable. Rich people in high-tax states are paying more federal tax, not because the federal tax rate has gone up, but because Congress decided to stop helping the states hide the effect of their unsustainable tax-and-spend policies. Those who destroyed the norms of federalism now wish the courts to re-erect them—but only insofar as it helps their friends.
All of these lawsuits and legal hedges are rooted in the same complaint: the rich blue states want to keep imposing high taxes on their people and want the federal government to help them obscure the consequences.Their argument here is that imposing the same rule on all taxpayers is unfair.
“By decreasing state tax revenue and making state taxes more expensive,” they write in the complaint, “the new cap on the SALT deduction will ultimately force the Plaintiff States to choose between maintaining or cutting their public investments and level of services, and the taxes supporting them. As such, the new cap on the SALT deduction directly and unfairly interferes with the Plaintiff States’ sovereignty, by depriving them of their authority to determine their own taxation and fiscal policies without federal interference.”
Their argument here is that imposing the same rule on all taxpayers is unfair. That’s a definition of “unfair” that only a small child could love. What it really means is, “I didn’t get what I want.” What they want, as the complaint plainly acknowledges, is to avoid making hard choices to balance their budgets. Every other state has had to make hard choices, but these four states don’t want to. Unfair!
Even if it were true that the law is unfair, this would be a political argument, not a legal one. Politicians on the far left want the courts to impose rules that the people and their legislators have rejected. Even their own statements confuse to whom exactly the law is unfair.
New York Gov. Andrew Cuomo attacked the tax law as one “that benefits the 1% at the expense of middle-class families.” But the loss of the deduction hits only those families who pay more than $10,000 in state and local taxes—hardly the average Joes Cuomo awkwardly attempts to evoke.
This lawsuit will fail, and Connecticut’s too-clever workaround probably will, too. What happened in the Tax Cuts and Jobs Act of 2017 was a result that politicians from these four states found distasteful. It will force them to make the kind of hard choices that they were elected to make. It will make their previous bad decisions more obvious to their voters and put pressure on them to fix them. It will, in short, force them to govern.Twenty-first-century politicians will do nearly anything to avoid governing.
Twenty-first-century politicians will do nearly anything to avoid governing. The arguments are flimsy at best, and the remedy is uncertain. Asking the courts to strike down the partial limitation of a tax deduction is novel enough, but what comes in its place? Do they want the courts to impose taxes directly, an act that is at the core of a legislature’s functions?
They know this lawsuit is a damp squib, a feeble attempt to show the folks back home (and especially their rich donors) that they’re “doing something” to stop taxes on the rich from going up. Connecticut’s radical reform is somewhat better thought-out, but will certainly inflict unintended consequences on that state’s already struggling economy, even if the IRS doesn’t decide to ignore the whole shell game they are playing.
Like a child throwing a tantrum, they will flail and kick for as long as they can before finally having to do what they were elected to do: set a level of taxing and spending that their people can afford.
They said it wouldn’t happen, but it did: The money companies stashed overseas to protect them from high U.S. corporate tax rates is flooding back in, boosting growth, jobs and confidence in the economy. Thank the Trump tax cuts.
All told, the Bureau of Economic Analysis (BEA) reported, some $305.6 billion returned to the U.S. from overseas accounts. That’s a $1.2 trillion annual rate, and far more than the $35 billion one year before.
The BEA’s analysts explain why this happened: “The large magnitudes (of inward capital flows) … reflect the repatriation of accumulated earnings by foreign affiliates of U.S. multinational enterprises and their Continue reading
By Grover Norquist and Alex Hendrie • The Hill
The tax cuts passed by Congress and signed into law by President Trump six months ago are already impacting our nation in these ways.
Americans are paying less in taxes
Ninety percent of wage earners around the country are already seeing increased take-home pay because of tax reform. Under the bill, a family of four with annual income of $73,000 will see a tax cut of more than $2,058, a 58 percent reduction in federal taxes. Similarly, a single parent with one child with annual income of $41,000 will see a tax cut of $1,304, a 73 percent reduction in federal taxes.
Workers are getting raises and bonuses
Immediately after passing of the GOP tax cuts bill, businesses responded by giving their employees pay raises and bonuses. AT&T announced it would provide each of its 200,000 U.S. employees with a $1,000 bonus. Altria is Continue reading
The latest monthly Treasury report on taxes and spending shows that gross tax receipts in February were $1.4 billion higher than the year before. Weren’t the Republican tax cuts supposed to explode the deficit?
According to the report, the government took in $238.2 billion in taxes in February. The year before, tax revenues were $236.8 billion.
For fiscal year 2018, which started last October, taxes are up $50.5 billion compared with the same months last year, and are at a record high level for this five-month span.
The report does show that net receipts were lower in February compared with last year, but the main reason is that individual income tax refunds jumped $13.3 billion, while corporate tax refunds went up $4 billion, neither of which is the result of the tax cuts that took effect in January.
Even so, net receipts are up by $29.6 billion for the current fiscal year — a 2.4% increase — compared with the same period last year. That’s also a record high. (See nearby chart.)
Does this mean tax cuts are “paying for themselves”?
Not exactly. Income taxes collected in February were down $2.5 billion from last year — reflecting the new withholding tables. Corporate income tax collections, however, were essentially flat.
But remember, income taxes are hardly the only source of revenue for the federal government. And a faster-growing economy means more money pouring in from these other sources.
Payroll taxes, for example, are dependent on the number of people working and their wages. In February, the economy added 313,000 jobs, unemployment levels are now at or near record lows, and wages are climbing.
As a result, payroll taxes brought in $1.5 billion more in February than they did last year, and are up $11.4 billion this fiscal year. Federal excise taxes and customs duties are up $3.8 billion and $1 billion, respectively, this fiscal year.
What these numbers do show is that all the hand-wringing about the impact of the tax cuts on federal deficits was based on wildly exaggerated estimates of revenue losses, which failed to take into account the fact that a faster growing economy would offset at least of the lost revenue. That’s a point we’ve made repeatedly in this space.
In contrast, tax hikes almost always bring in less revenue than expected, because they dampen economic growth.
Democrats once understood this truism. It was JFK, after all, who said in 1962 “it is a paradoxical truth that tax rates are too high today and tax revenues are too low — and the soundest way to raise revenues in the long run is to cut rates now.”
Today’s Democrats, in contrast, uniformly opposed the Trump tax plan, and are now pushing to repeal most of it so they can spend an additional $1 trillion on government make-work infrastructure projects.
Their plan has no chance of being enacted, but at least voters will have a clear choice this November.
Brian Ellis • Investor’s Business Daily
Employers have until Thursday to implement new tax withholding guidelines, which determine how much they withhold from pay for federal taxes.
Fortunately for many Americans, job creators are already seeing lower rates and distributing larger paychecks. Treasury Secretary Steve Mnuchin estimates more than 90% of working Americans will see greater take-home pay because of the Tax Cuts and Jobs Act’s new withholding guidelines.
It’s further proof that tax cuts are working for the middle class. To date, more than 330 U.S. employers have publicly announced tax-induced wage hikes, 401(k) increases, and generous bonuses. While Apple and Wal-Mart grab the headlines, many beneficiaries of the Republican tax bill are small businesses, which account for two-thirds of new jobs in the country.
Missouri-based Dynamic Fastener, a construction hardware supplier, is rewarding employees with bonuses of up to $1,000, while also opening a paint shop, buying new equipment and Continue reading
by Lawrence Kudlow, Stephen Moore, Arthur B Laffer, and Steve Forbes • Investor’s Business Daily
President Trump and Republican leaders in Congress must act with much more urgency and decisiveness on tax cuts.
In recent weeks the tax cut agenda seems stalled out and the delays and indecision are negatively affecting growth and the stock market. We hear that a tax plan from the White House may not come until the fall and may not even pass Congress until 2018 – if at all.
Is it any wonder that investors are getting jittery? The stock market had priced in much of the anticipated benefits to business, wages and profits, which accounts in no small part for the $3 trillion rise in equity values and the surge in business and consumer confidence after the election. Now the confidence is waning. Continue reading
by Peter Roff • Washington Examiner
Though America has prospered since the end of the so-called “great recession,” the economy has grown by so little it’s hardly worthy of mention. The boom that began under Ronald Reagan ended with the collapse of the sub-prime mortgage industry. The country is no longer moving. Something must be done to get things going again.
The answer to our problems is simple. America needs tax reform to get moving again. There are a number of good, serious proposals out there from the Hall-Rabuska flat tax to the “Better Way” plan being pushed by House Speaker Paul Ryan. None of them is perfect but they’d all produce lower rates by eliminating deductions and credits. They’d all make the system simpler, and they’d all goose the economy to get annual growth in U.S. GDP where it should be, around three or four percent annually if not higher. Continue reading
How Congress, Trump rework the tax code without abandoning conservative principles
Imagine going to your boss with your personal budget. The list would include things you want to spend money on, such as: your home, car, groceries, dining and entertainment projections, vacation plans, charitable giving goals, etc.
Now picture telling your boss he must fund your planned budget. You don’t bother to discuss your value to the company, but rather demand he fully fund your personal budget.
This is a difficult conversation to imagine because the real world doesn’t work that way. We don’t get paid based on what we want our personal budget to be, but rather the value we provide. Then based on what we receive, we budget accordingly. Yet, big government demands that it play by a different set of rules. Continue reading
Rather than trying to ban the practice, why can’t Obama address corporate tax reform?
by Charles Krauthammer • National Review
The Obama administration is highly exercised about “inversion,” the practice by which an American corporation acquires a foreign company and moves its headquarters out of the U.S. to benefit from lower tax rates abroad.
Not fair, says Barack Obama. It’s taking advantage of an “unpatriotic tax loophole” that hardworking American families have to make up for by the sweat of their brow. His treasury secretary calls such behavior a violation of “economic patriotism.”
Nice touch. Democrats used to wax indignant about having one’s patriotism questioned. Now they throw around the charge with abandon, tossing it at corporations that refuse to do the economically patriotic thing of paying the highest corporate tax rate in the industrialized world. Continue reading
How often have you heard a Democrat prattle on and on about how well Barack Obama has done with the economy, given the mess he inherited? Usually, it’s some version of, “Things are getting better, but the economy the President started with was so awful, so he’s done as well as anyone could expect.”
When Ronald Reagan took over from Jimmy Carter in ’81, things were actually worse economically compared to when Obama took over from George W. Bush in ’08. Continue reading
Our corporate tax rates are far too high. The rate kills investment and job creation and it makes us less competitive with other nations who have had the good sense to lower their tax rates. Germany has cut its rates almost in half in the last 25 years. Socialist Sweden has cut its by more than one half. And Ireland has cut its rates by almost 75%. We, on the other hand, have raised our corporate tax rates over that time period — leaving us with the highest rates in the industrialized world.
It is no coincidence that our unemployment rate is historically high and our labor participation rate is historically low. It is also no coincidence that our economic growth rate is painfully slow and far too low.
We realize that there will not be any meaningful tax reform or lowering of the tax rates this year. But the idea that the Senate Finance Committee might consider extending some legitimate tax deductions for manufacturing that actually make profits and employ people, but killing others means that the Senate plans to raise taxes on some american corporations at a time when the economy is weak, employment numbers are bad and taxes are already too high. This is bad policy! Continue reading
by Arthur Laffer
In June of 2006, I deserted my long-time friend and love of my life, California, for the unknown venue of Tennessee. The push and the pull of the two locations are pretty obvious — taxes. Tennessee, like Texas, has no state income tax, no state capital gains tax, lower property taxes, lower workers’ compensation costs and roughly the same sales tax rate. California, on the other hand, is just simply tax- and fee-crazy.
But in spite of all the tax, fee and regulatory reasons for leaving California, I was deeply concerned that I would be stranded in an uneducated, lawless morass of tobacco-chewing Neanderthals driving old clunkers on dirt roads where churches were on every street corner and there wasn’t a hospital to be found. Continue reading
I am here today because I believe the public policy status quo in Washington – and in particular, within the Republican Party – must once again be challenged and transformed. The focus of my remarks will be the new tax reform proposal I will soon be introducing in the Senate.
But before I get into the specifics of the legislation, I think it’s important to explain the problem it has been designed to solve.
On this Constitution Day, allow me to begin with thoughts from perhaps the two most important constitutionalists in American history. The first, from James Madison, is that the “object of government,” is “the happiness of the people.” The second, from Abraham Lincoln, is that the role of government is: “…to lift artificial weights from all shoulders, to clear the paths of laudable pursuit for all, to afford all an unfettered start and a fair chance in the race of life.” Continue reading
Will Rogers once said, “It is a good thing that we do not get as much government as we pay for.” That may be true, but I think we all wish we were paying for a lot less government and a lot less taxes. Our federal government is at historically high levels of spending — in recent years gobbling up nearly 25% of the total economic output.
Every year, the federal government spends more money than it did the last year. Even this year with the “sequester,” federal government will spend more money this year than it did the year before. Continue reading
Americans are migrating from less-free liberal states to more-free conservative states, where they are doing better economically, according to a new study published Thursday by George Mason University’s Mercatus Center.
The “Freedom in the 50 States” study measured economic and personal freedom using a wide range of criteria, including tax rates, government spending and debt, regulatory burdens, and state laws covering land use, union organizing, gun control, education choice and more.
It found that the freest states tended to be conservative “red” states, while the least free were liberal “blue” states. Continue reading