With its residents and businesses shipping well over $200 billion in federal taxes to Washington every year, Texas understandably has a big stake in the unfolding congressional battle to reshape and simplify the nation’s agonizingly complex tax system.
President Donald Trump has dubbed his proposed tax overhaul as a “revolutionary change” designed to ease the burden on the middle class, bolster job creation, level the international playing field for American business and shrink tax filing to the size of a postcard.
In Texas, which typically has the largest collective tax bill of any state except California, assessing the impact generally depends on which taxpayer is doing the assessing.
Although many of the details of the so-called Republican blueprint await congressional action, the plan has drawn high marks from Texas business leaders, who say it would further boost the state’s already robust economy. Others, echoing criticism at the national level, say the plan would benefit the wealthy at the expense of the poor and middle class and exacerbate the federal deficit, resulting in reduced federal aid to Texas and other states.
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In a recently released study, the Texas Association of Realtors said that the combined provisions in the plan would save Texas households more than $830 million in tax expenditures in 2018. But under the reduced and reshuffled tax brackets, said the study, only those with adjusted gross incomes over $200,000 would benefit from tax relief while the remaining 95 percent of Texas households “can expect a higher overall tax burden.”
The report, conducted by Angelou Economics of Austin, also predicted that the plan would result in a statewide economic loss of $3.4 billion in part because increased taxes among lower and middle-income consumers will result in less purchasing power.
“We wanted to do the analysis to see what the impact would be on Texas,” said Daniel Gonzalez, director of legislative affairs of the Realtors’ association. “We certainly think it’s time to do some tax reform, but if we’re going to promise tax relief to middle America, we need to make sure we deliver on that promise, and right now, the blueprint, according to our analysis, does not deliver on that tax relief promise.”
‘Opportunity to make history’
The contrasting assessments are also evident in the positions espoused by U.S. lawmakers from Texas as Republicans begin pushing the measure toward an upcoming tax fight in the House — the constitutional starting point for tax bills — against fierce opposition from Democrats. Architects of the plan are also braced for an onslaught of lobbying to defend special interest provisions endangered by simplifying the tax code.
Rep. Michael Burgess, R-Lewisville, whose district includes Tarrant County, said the tax effort offers “an extraordinary opportunity to make history” and will “put our country on the path to long term economic stability.”
Conversely, Rep. Marc Veasey, D-Fort Worth, calls the plan “harsh and cruel” because of the elimination of key deductions and exemptions, including the $4,050 personal exemption for filers and dependents, which Veasey said is vital for tax savings by ordinary citizens. He said he plans to repeatedly tell constituents and the news media “that the meat and potatoes that are in this Republican plan are really poisonous to the middle class.”
One of the plan’s most visible defenders is the Texas congressman who will be leading the drive to push it through the Republican-controlled House: Rep. Kevin Brady, R-The Woodlands, chairman of the tax-writing House Ways and Means Committee. Brady is one the “Big Six” — the team of congressional and Trump administration officials who were instrumental in shaping the blueprint, or framework, that the president unveiled in late September as the starting point for tax reform.
Highlights of the nine-page blueprint would reduce the number of individual tax brackets from seven to three, slash the U.S. corporate tax — now one of the world’s highest — and eliminate most tax deductions except for incentives for home mortgages and charitable donations.
As originally proposed, the plan would also eliminate deductions for state income taxes, sales taxes and property taxes, although Brady has reportedly sent signals that those deductions may be at least partially retained because of pushback from Republicans in states where the incentives are popular with taxpayers.
The absence of a state income tax in Texas is often touted as one of the state’s major selling points, but sales taxes are a major source of revenue and can be deducted on federal income tax returns. Preserving that deduction for her constituents was a high priority of former Sen. Kay Bailey Hutchison, the current NATO ambassador who represented Texas in the Senate from 1993 to 2013. Current Sen. John Cornyn once described the deduction as “a big deal back home in Texas.”
Of the 12.1 million returns filed for the 2015 tax year, according to the IRS, 2.2 million, or 18 percent, claimed sales tax deductions.
A similar number, 2.3 million, or 19 percent, claimed property tax deductions. According to the Realtors’ study, repealing the property tax deduction would “limit the options available to homeowners and effectively increase the tax liability of Texas households.”
‘Crucial for Congress to act’
In a telephone interview with the Star-Telegram last week, Brady said he plans to present a detailed bill to his committee and is pursuing a timetable to finish “big bold tax reform” by the end of the year.
“It’s crucial for Congress to act,” he said, adding that he is driven by two overriding goals. One is to create economic growth by “getting people back to work and higher paying paychecks” and the other is to “eliminate many of the special-interest deductions and loopholes that riddle the tax code today.”
Brady, a former Texas legislator and 20-year congressman who became Ways and Means chairman in November 2015, predicts that special interests “will fight tooth and nail” to protect pet tax provisions “even if it means killing tax reform.” Fending off lobby attacks, he said, looms as “our biggest challenge.”
He strongly disputed analyses showing that the blueprint will worsen the tax burden on the poor and middle class and exacerbate the federal deficit. Brady specifically took issue with a report by the Urban-Brookings Tax Policy Center that said the plan would reduce federal revenue by $2.4 trillion over 10 years and would deliver the biggest tax cuts to those “with the very highest incomes” under the consolidation of the tax brackets.
“Baloney,” Brady said. “It’s a work of fiction that Stephen King would be proud of.” He noted that specific income categories haven’t been set for the new brackets and said that the ultimate goal is to focus on “very strong middle class tax reform.”
One major benefit for those at the lower end of the economic spectrum, according to the blueprint, is doubling the standard deduction, which would effectively create a larger “zero tax bracket” by eliminating taxes on the first $24,000 of income earned by a married couple and $12,000 earned by a single individual.
But Dick Lavine of Austin’s Center for Public Policy Priorities, which advocates for lower- and moderate-income Texans, contends that in Texas, the plan “will be a big tax break for the people with the most money.” And by potentially increasing the deficit, he said, “that would put a lot of pressure on Congress to start cutting back on programs like Medicare and Medicaid, Social Security and education.”
The Texas Public Policy Foundation, a free-market pro-business think tank in Austin, as well as leading business organizations, have endorsed the blueprint’s call to boost U.S. competitiveness by slashing the 35 percent corporate tax rate, the highest in the developed world, to 20 percent, putting it below an international average of 22 percent.
“Having a job is the best way to prosperity and we find that there are many parts of this plan that would allow for an economic environment that is more conducive to job creation,” said Vance Ginn, senior economist at the foundation.
Jeff Moseley, CEO of the Texas Association of Business, said that while many details have yet to be fleshed out, “everything we have seen so far is extremely positive,” and he predicted that the proposed reforms “would deliver economic growth, jobs and paychecks.”
Business leaders said the cumulative effect of the corporate tax reduction and related provisions would contribute to Texas’ efforts to maintain a low-tax, low-regulatory climate for business and would perpetuate and strengthen Texas’ stature as the nation’s leading exporting state.
Texas has held that ranking for 14 years and exported $248 billion worth of goods to other nations in 2015, according to the latest available data.
Under the Republican blueprint, Texas would be “more globally competitive” and could plow back added profits into plant modernization and job creation, said Tony Bennett, president and CEO of the Texas Association of Manufacturers, whose 500 member companies include 75 of the state’s largest employers.
President Trump’s tax reform plan: a mini-guide
Working title: “Unified Framework for Fixing Our Broken Tax Code”
The engineers: Developed by the Trump administration, the House Ways and Means Committee and the Senate Finance Committee
Noteworthy: Hailed as the first comprehensive overhaul of the 73,900-page tax code since the Reagan-era Tax Reform Act of 1986.
Timetable: Supporters hope for congressional enactment by the end of the year, but skeptics say the goal is far too optimistic as proponents encounter fierce opposition as they seek to transform the Republican framework’s general outline into specific legislation.
▪ Consolidates the current seven tax brackets into three brackets of 12, 25 and 35 percent.
▪ Doubles the standard deduction from $6,300 to $12,000 for single filers and from $12,000 to $24,000 for married taxpayers filing jointly.
▪ Reduces the corporate tax rate from 35 percent to 20 percent.
▪ Repeals the $4,050 per person exemption for filers and dependents and increases the child tax credit.
▪ Retains tax deductions for mortgage interest and charitable deductions but eliminates other itemized deductions. The current hit list includes deductions for sales and property taxes, used in less than 20 percent of Texas returns, but architects may be moving toward partly restoring those.
What they’re saying
Proponents: Will reduce tax filing to postcard simplicity, provide tax relief for the middle class and small businesses, enhance U.S. competitiveness and bolster Texas’ stature as a job creator and the nation’s leading exporting state.
Detractors: Will exacerbate the federal deficit, benefit the wealthiest in both Texas and nationally and hurt, rather than help, the poor and middle class, in part because of the elimination of deductions and exemptions.
Man to watch: Texas Rep. Kevin Brady of The Woodlands. As chairman of the tax-writing House Ways and Means Committee, he leads the tax overhaul in the House and is one of the “Big Six” team of congressional and administration leaders charged with pushing the plan to reality.