Beyond household budgets, new GOP tax plan will affect schools and businesses

Enterprise file photo — Michael Koff

A break for business: Mark Eagan, the Capital Region Chamber of Commerce’s chief executive officer, said most businesses will benefit from changes to the tax code.

ALBANY COUNTY — Uncertainty for most and optimism for some has been the reaction of locals to the most sweeping changes made to the tax code in decades.

On Dec. 22, President Donald Trump signed into law the largest change to the tax code since President Ronald Reagan’s Tax Reform Act of 1986.

The new GOP tax law will begin in January.

The $1.5 trillion bill dramatically and permanently cuts the corporate-tax income rate as well as dropping individual-income rates for a limited period, while also eliminating numerous deductions.

The tax bill is estimated to drive up the federal deficit by $1 trillion, according to Congress’s official tax scorekeeper, the nonpartisan Joint Committee on Taxation.

Republicans say that the bill will “pay for itself.”

They argue, because taxes are lowered, business investment will ignite hiring and wage growth. This will allow the economy to boom and with it the amount of money that is being taxed.

Democratic detractors like Paul Tonko, representing the Capital District in Congress, voted against the House version, saying it “hurts teachers, students, parents, schools, veterans, people with serious medical illness, and a long list of others.” He cited a review from the Congressional Budget Office that found the plan would raise taxes on most Americans earning less than $75,000 a year by 2027, and add $1.4 trillion to the Federal deficit over the next decade, and lead 13 million Americans to lose health insurance.

There is little evidence in the history of this country that lowering taxes on business has spurred economic growth.

What is agreed upon is that, eight in 10 Americans will pay lower taxes next year, while 5 percent will pay more, according to the nonpartisan Tax Policy Center.

But in New York, taxpayers could see an increase in their taxes.

“To my knowledge, in the history of federal-tax changes post-World War II, there is nothing quite like this,” said E.J. McMahon of the right-leaning Empire Center for Public Policy. “Because the way they changed the individual income tax as well as the sharp curtailment of state and local tax [SALT] deductions was done explicitly, cynically, and politically, to take more money from the so-called blue states, like New York.”

The new plan eliminates taxpayers’ ability to deduct more than $10,000 in state and local taxes from their federal tax returns, which could increase the tax burden of taxpayers who itemize their deductions, rather than taking the standard deduction.

Savings for most

McMahon analyzed data from 2015 tax returns from nine ZIP codes in the Enterprise’s coverage area: 12009, 12059, 12193, 12147, 12120, 12186, 12041, 12067, 12159, and found that “the vast majority, the overwhelming majority,” of residents in the Enterprise-provided ZIP codes “will get a tax cut,” he said.

As an example, McMahon looked at joint filers from 12009, which includes Guilderland Center, Altamont, and parts of Knox, who earn between $100,000 and $200,000. This accounts for 690 (there are 790 total tax returns in the $100,000 and $200,000 range) of the 3,760 tax returns from that ZIP code.

On average, the joint filer is married with one child and itemizes deductions. The joint filer earns about $138,000 annually, and claims about $14,000 in state and local tax deductions and about $11,000 in other deductions.

That joint filer will see a tax cut of about $1,500, according to McMahon; an individual filer will see a smaller tax cut.

Using the same example of a joint filer from 12009, McMahon determines that filers in the ZIP codes of 12186, which includes Voorheesville and New Salem, and 12041, which includes Clarksville, will see a similar tax cut.

Though not everyone will see a tax cut.

“Slingerlands is a little different,” McMahon said.

He is referring to the 12159 ZIP code, which includes New Scotland, Slingerlands, Delmar, and Westmere. Using the same method that he used for 12009, 12186, 12041.

“If you look at the average for Slingerlands, which is wealthier, the average income in that bracket is $144,000 [$138,000 in previous example], the average state and local tax deduction is $16,000 [$14,000 in previous example] … The average of other deductions is $12,000 [$11,000 in previous example] … That joint filer will pay $46 more in taxes,” McMahon said.

“If you have higher income and higher state and local taxes, you’re more likely to pay a small tax increase,” he said. “And every place else is similar.”

“I don’t like it by the way; I am not a fan of a tax bill,” McMahon said. “I think the repeal of the state and local tax deduction was deeply unfair.”

SALT

The SALT deduction, according to the nonpartisan Tax Policy Center: “provides an indirect federal subsidy to state and local governments by decreasing the net cost of non-federal taxes to those who pay them.”

For example, if state income taxes increase by $100 for families claiming the SALT deduction on their federal returns who are in the 35-percent federal income-tax bracket, the net cost to them is $65; that is, state taxes go up by $100, but federal taxes go down by $35, according to the Tax Policy Center.

“This federal tax expenditure encourages state and local governments to levy higher taxes (and, presumably, provide more services) than they otherwise would,” according to the Tax Policy Center.

The state and local tax deduction has two parts: A deduction for state and local property taxes [SALT] and a deduction that can be used for either state income taxes or state sales taxes — whichever is higher.

In New York, taxpayers use the deduction for SALT.

Under the new GOP tax bill, filers who itemize their deductions will now be able to claim only up to $10,000 for state and local tax deductions. This is a major change from the current unlimited amount of state and local income taxes, sales, and property taxes Americans can deduct.

SALT deductions benefit New York taxpayers who itemize their deductions because they pay more in, among other taxes, state and local taxes than the standard deduction allows for, which in New York is about one-third of filers.

In a Dec. 22 executive order, Governor Andrew Cuomo temporarily amended state law to allow for payment in 2017 of 2018 property tax bills and 2018-19 school tax bills.  

By contrast, the majority of the state’s taxpayers take the standard deduction. Under the new GOP tax plan, for individuals, the standard deduction would go from $6,350 to $12,000, and for joint filers, it goes from $12,700 to $24,000.

“While we have lowered state income taxes, capped property taxes and are forcing local governments to consider shared services, this federal act would erase all those gains and in fact increase taxes. Eliminating state and local deductibility will result in a tax increase of $5,660 on average for one in three taxpayers in New York, or 3.3 million New Yorkers,” said Governor Andrew Cuomo in a letter to President Donald Trump.

According to the governor’s office, the loss of SALT will have a $435 million impact on the Capital Region; and a $17 billion impact on the $163 billion state budget.

In Albany County, according to the governor’s office, 43,292 of 43,780 filers who take a state and local tax deduction will be impacted with an average impact of $3,094 per filer, which leads to a loss of $134 million for the county.  

While not normally on the same side of an issue as the governor, McMahon is in agreement that the SALT deduction should not have been eliminated — but makes a conservative argument for keeping it.

“I think, from a conservative standpoint, the state and local tax deduction is something that is consistent with the Federalist system,” he said. “I don't like New York State’s tax-and-spending policies; I've spent most of my adult life criticizing them. However, the state and local tax deduction has been part of the income tax since the income tax was introduced.”

SALT deductions exist because state and local governments — not the federal government — are the prime level of government in the United States, McMahon said. “It was basically a recognition that the level of government closest to you should, in effect, have first dibs on potential tax revenue, because state and local tax revenue provide most of the services, the vast majority of government services, that are important to you,” he said.

An analysis from the National Education Association, the country’s largest teachers’ union, claims that over the next 10 years, in New York, over 24,000 teaching jobs and $36,844,169,000 in funding are at risk due to the repeal of SALT.

Education

Local school leaders are already on edge because of a current $4.4 billion state budget shortfall, and their anxiety only becomes compounded with the new GOP tax law because the state budget is overly reliant on a relatively small number of taxpayers; about 40 percent of income-tax revenue comes from 1 percent of the state’s taxpayers.

In fiscal year 2015, in New York State, 62.3 percent of total tax revenues came from income taxes, while education accounted for 26.4 percent of state expenditures, according to a report from the National Association of State Budget Officers.

The worry is that, combined with the loss of state and local tax deductions, some taxpayers may decide that it no longer makes financial sense to live in New York. And with the state being reliant on so few wealthy taxpayers, it wouldn’t take many of them moving to blow a hole in state and local finances.

The budget shortfall is worrisome because economic data doesn’t provide a good explanation for why the state tax receipts are faltering, according to Robert N. Lowry, the deputy director for advocacy and communication at the New York State Council of School Superintendents. “Economic conditions suggest we should be doing better — but we’re not,” he said.

The hypothesis, according to Lowry, is that some wealthier taxpayers have said, “We don't have to pay taxes right now; we can hold off until 2018 and not have to pay such high taxes on their income.”

Lowry went on, “What I've been saying to superintendents is that the current situation is as volatile and uncertain has anything I can recall, and I have been involved with state budgets for over 30 years, in one capacity or another. I don’t know what to tell people; there’s a lot to worry about.”

Lowry said there is nothing analogous to what schools could face. In the past, with a recession, there was the understanding that things were going to, eventually, get better. “This we just don’t know. If the worst fears are borne out, and it doesn’t get better, the state and school districts have to make permanent changes in how they operate,” he said.

The long term worries Lowry because the loss of state and local tax deductions will probably become a political problem as well.

“There’s the concern if you pay your taxes next year [in April], and pay significantly more in federal taxes, then the next month in May [when school budgets’ are voted on] you'll go to vote on the school bill and decide that you don’t want to pay that tax,” he said.  

For Timothy Mundell, superintendent of the Berne-Knox-Westerlo Central School District, state aid has been critical; BKW receives about $10 million of its total budget of about $22 million from the state.

“In the past couple of years, we’ve been able to add programs while keeping our tax-levy level,” he said. “We’ve been able to significantly increase opportunities for students, and I don’t want to pull back on that.”

“In recent years, the budget process has been very supportive on the state level,” said Mundell.

The new tax plan could significantly alter that.

This issue becomes compounded in the Hilltowns and across rural areas, said Mundell, because it’s more difficult to provide the same opportunities that suburban schools can provide.

But state funding is an issue in more affluent districts as well.

“The biggest concern, even though we are a wealthier district, is the Foundation Aid,” said Francis Rielly, the assistant superintendent of finance and operations in the Voorheesville Central School District. “When that gets cut or there is a reduction, that is going to affect everybody’s budget, regardless if you’re an urban rural or suburban school.”

“That kind of money [Foundation Aid] is figured into your budget,” Rielly said of the basic state aid for public schools. “A reduction in that really affects you moving forward, with what your plans are.”

The state’s Foundation Aid program supplements local funding for school districts to help provide sufficient resources for an adequate education, and is allocated based on need. So although Voorheesville and BKW serve nearly the same number of students — BKW serves fewer — Voorheesville, which is wealthier, receives about $3.5 million in Foundation Aid; BKW about $6 million.

“A small district like Voorheesville, the vast majority [of funds] is coming from the tax levy,” Rielly said. But he stresses that that Foundation Aid is critical for all districts because it creates a “foundation” on which schools build their programs.

With the potential loss of revenue from other sources, Rielly and Mundell highlighted the difficulty that districts face in raising more funds due to the governor’s signature legislative accomplishment — the 2-percent tax-levy limit.

“With a potential reduction in the Foundation Aid compounded by the tax cap, it’s not like the old days in the 1990s, where you are going to go out and raise a community’s taxes — you need to keep that levy under 2 percent,” said Rielly. “You’re going to have a shortfall.”

Rielly and Mundell point out that the increased tax levy is quickly used by the districts.

Because of contractual agreements, insurance premiums, health care, or increases in retirement-system contributions, the tax-levy limit acts almost as cost-of-living increase, and doesn’t leave funds for much else.

“When I look at that with the possibility of cuts in state aid, it’s a scary proposition,” Rielly said. “It definitely keeps me up at night. There is a lot of unknown right now; there is hyperbole on both sides. I'm waiting for definitive numbers to come out.”

“One of the other pieces in this federal bill that hasn't got much airplay is the 529 Plans,” said Mundell, referencing Section 529 of the Internal Revenue Service code.  

The 529 Plan was originally designed as a mechanism for students’ families to save for college.

Under the new GOP law, families can now use those 529 Plans to pay for private school from elementary through high school.

It’s thought that mostly wealthier people who have the ability to save would reap the tax benefits.

Mundell said the change concerns him because it gives incentive to parents to take their children out of public school. “It reflects the current administration's attitude towards public education,” he said.

Business

“The impact on business is too early to know,” said Mark Eagan, the Capital Region Chamber of Commerce’s chief executive officer. “But I think it’s safe to say most businesses are going to benefit from changes to the tax code.”

Locally, most businesses are set up as pass-throughs — where profits are “passed through” to the owners’ personal tax forms and business income is taxed at personal tax rates, avoiding the corporate tax. Some pass-through businesses will receive a 20-percent cut under the new law. The GOP plan also cuts the corporate income-tax rate from 35 percent to 21 percent.

Craig Shufelt, a Republican who owns his own company, Shufelt Group, LLC., a marketing, development, and branding firm in Voorheesville, is in favor of the tax bill and agrees that businesses will benefit but said that there are more important things than just getting a tax cut.

He said the bill will not determine whether a business succeeds or fails, because “at the end of the day, it comes down to: Do you have a good product or not?”

Eagan also pointed out that a tax cut is just one ingredient to a successful business.

“In the short-term, business tax cuts are an economic plus — all big tax cuts like this tend to, especially one focused on corporations,” said McMahon. “There will be some sort of economic boost, but the strength and duration of that boost is highly debated among economists.”

Republican state Senator George Amedore is more bullish on the GOP tax plan: “This helps strengthen small businesses and strengthens our economy,” he said.

Amedore said that the bill will allow small businesses to retain more of their earnings and invest it back into the business.

He also said the tax plan is a win for employees as well because they should see an increase in their paycheck. The plan has already given Amedore confidence with regard to his own business, Amedore Homes.

“I can tell you today, because of the news of the bill, because of potential savings the business could have, we committed to another piece of property that we want to develop,” he told The Enterprise.

Sandra Dollard, the owner of Evoke Style, a women’s clothing store in Stuyvesant Plaza who runs her business as a pass-through, said she plans to give her employees raises and use what’s left to make upgrades to her store. Dollard points out that, while the tax cuts are good for her, there are some state and federal regulations that she says make it more difficult for her to run her business that, if rescinded, might help her as much as a tax cut.

New worker scheduling rules is one example, she said. The new regulations make it more difficult because, according to Dollard, when people call in sick or just take a day off, she has to pay someone more than the time they work to cover that shift. It is a loss of flexibility, she said.

The new regulations call on employers to set employees’ schedules two weeks in advance.

While stopping short of prohibiting on-call scheduling — the business practice where employees are expected to be available at any time to work, usually on short notice — the new regulations require most hourly workers to receive an extra two hours of minimum-wage pay for assignments received without two weeks' notice.

The new regulations also require an employer to pay an employee for four hours if a shift is cancelled within 72 hours of starting time.

Without the new regulations, advocates say that on-call scheduling would be a serious problem for retail workers; the uncertainty of not knowing their schedule in advance would prohibit workers from holding a second job or arranging child care.

Dollard also said that, because of federal regulations, the administrative cost of an employee benefit that she offered quadrupled, forcing her to stop offering the benefit.

A preview of what’s to come?

Kansas — a state that President Trump carried by 21 points — has seen this movie before.

In 2010, while running for governor, Republican Sam Brownback vowed to make the state “a petri dish of conservative economic theory.”

By 2012, Brownback had browbeat enough moderate Republicans into joining with conservatives to pass an extremist tax plan that eliminated Kansas’s top income-tax bracket and drastically slashed rates. The plan also established an  income-tax exemption for limited liability corporations, which turned out to give giant tax breaks to a very few, according to reporting in The American Prospect, a Washington, D.C.-based liberal magazine, published daily online and printed four times a year.  

To pay for part of the plan, Brownback cut many tax credits that benefited low- and middle-income residents.

He was attempting to completely alter the way Kansas collected revenues. Instead of paying for state government through income taxes, he wanted to transition to a government that was financed entirely by sales and property taxes, what he referred to as “consumption taxes.”

“Today’s legislation will create tens of thousands of new jobs and help make Kansas the best place in America to start and grow a small business,” Brownback said in 2012, the day he signed the tax cuts into law.

Since 2013, the country has had job growth of 7.6 percent — Kansas, 3.5 percent, according to a report from the Center on Budget and Policy Priorities.

The state’s economy has grown less than half as fast as the national economy and the share of newly opened businesses has declined slightly rather than increased, according to the report.

Brownback called the plan his “march to zero.”

Kansas would cut income and corporate tax rates a little bit each year, until there weren’t any left.  

The impact of cuts was immediate — and not for the better.

In the fiscal years 2013 to 2014, revenue fell $713 million; Kansas’s general fund was $6 billion.

Very quickly, Brownback used all of the state’s reserve funds and added $1.3 billion to Kansas’s debt, through increased borrowing.

The cuts coupled with Brownback’s ideology created a state-wide crisis in health care and public education.

By March 2017, the Kansas Supreme Court deemed the state's spending on public education unconstitutionally low.

After Brownback won re-election in 2014, it was determined that Kansas would be $1 billion short of revenue estimates for 2015 and 2016.

Refusing to raise the tax rate, Brownback instead diverted $100 million from the state’s highway fund and shorted the state’s retirement system $40 million.

Finally, this past June, as the promise of a “trickle-down” economy was proven false, Kansas’s Republican-dominated legislature passed a $1.2 billion tax increase — over the veto of Brownback.
 

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