Fasten Your Seatbelts on Tax Reform
By Albert B. Kelly
You would think that something like Tax Reform would be
something everyone could get behind- after all the last time we had a
substantial overhaul of the tax code was back in 1986 when Reagan was
president, Tip O’Neill the Speaker of the House, and Russia was still the
U.S.S.R. It is also worth noting that one of the hit songs that year was “That’s
what Friends are For” courtesy of Dionne Warwick.
I say that because the tax code overhaul of 1986 was
possible in large part because Reagan and O’Neill got together, in a friendly
way- in the evening- talking and occasionally drinking as men do, in order to
come to some type of meeting of the minds. No one got everything they wanted,
there was compromise on both sides, but the thing got done and worked for the
better part of 30 years.
When they did the 86’ reform, what author T.R. Reid referred
to as a “breaking point” for the tax code in his recent book “A Fine Mess”
about creating a fairer and simpler tax code, it had been 32 years since the
last major overhaul back in 1954. Before that, it was 1922, also a 32 year
timeframe. So it is no accident that as we’re looking at a 2018 overhaul, it’s
exactly 32 years since Reagan and O’Neill sat down together.
All of that is to say, it’s time that we revisit the tax
system and see if we can’t simplify and streamline the thing to serve the new
normal of the 21st century. The question is what that overhaul will
look like. As we speak, the administration is considering doing away with state
and local tax deductions.
For New Jersey, that would be a body blow since we pay the
highest property tax rates in the country. Without being able to deduct state
and local taxes, taxpayers would end up with an average tax bill somewhere in
the neighborhood of $3,500 above what we’re paying now. The impact will crush what’s
left of the middle class as not many households can easily take a $3,500 hit.
According to NJ Congressmen Bill Pascrell and Leonard Lance
who, along with Congressman Donald Paine are out front on the issue, some 1.8
million people around the state itemize deductions each year which is worth
about 8.7% of their income on average with most of those earning well below
$200k per year. Pascrell and Lance go on to point out that NJ receives a lot
less than we give, ranking 41st in terms of how much we get back
from the feds.
Numbers will fly around as the debate rages on, but somehow
you just know deep down that the very wealthy will get the breaks and they’ll
be paid for on the backs of the working poor and the barely surviving middle
class. You also know that we’ll get some nonsense about how tax cuts will offset
revenue losses by creating growth and it will all somehow “trickle down” to the
peasants. How’s that working out in Kansas?
But there’s more. The administration is also playing with
the idea of eliminating tax exemptions for municipal bonds. You may not think
that matters, but it does. Municipalities issue bonds in order to do any number
of things including infrastructure projects like sewers and roads, recreation
venues, government buildings, and other such capital projects.
Having the federal income tax exemption on the interest
earned on those municipal bonds has kept the cost of issuing them down so that
it’s the best option finance-wise. Losing this advantage would have
municipalities seeking higher rates of return to attract buyers of those bonds
which would increase costs to municipalities and more importantly, to the tax
paying public.
Municipal bonds are the life blood of cities and counties
and it is how we get major capital projects completed. And not for nothing, but
these projects create jobs and inject revenue into local economies. Take this
away, and the cost of getting infrastructure done becomes a killer- of
projects, jobs, and communities.
I think everyone agrees that after 32 years, it’s time for
the tax system to be overhauled. My fear is that what we’ll get is some
tinkering around the margins that will benefit the wealthy few at the top of
the heap at the expense of everyone else trying to keep our heads above water. Insist
on more, insist on fairness and equity.