🔒Caution: Federal tax plan offers uncertainty for CT

In 1986, Democrats and Republicans joined President Ronald Reagan to enact bipartisan “tax reform.” The headlines were all about fairness, simplification, economic stimulus and middle class tax relief.

Fast-forward past the worst economic collapse since the Great Depression, massive growth in the federal deficit and an accelerated wealth gap among Americans. Now, they are at it again — except it is anything but bipartisan.

What can Connecticut expect this time from a tax overhaul? In their book about the 1986 tax changes, authors Jeffrey Birnbaum and Alan Murray called it the “Showdown at Gucci Gulch” — a feeding frenzy of lobbyists, tax attorneys, message spinners and their political champions inside the Washington beltway.

Why do we expect it to be any different this time? It's safe to say, the last things to expect this time are fairness, simplicity, grassroots economic stimulus and middle income tax relief.

Bear in mind that this is not just a tax debate. Its proponents mostly pay for the tax cuts by assuming fantastic economic growth. Alternatively, “starve-the-beast” advocates know that tax cuts are the best way to stage big cuts in federal spending, like Medicaid and Obamacare, that shift huge costs to state taxpayers and consumers. And nothing converts fiscal conservatives into swooning kick-the-can-down-the-road deficit spenders more than a tax cut.

At this point, the Trump administration and congressional leaders have offered little more than talking points. It looks like Treasury Secretary Steven Mnuchin is the point person for President Trump, but who knows if anyone is ever really the point person for this president. House Speaker Paul Ryan, a committed supply-sider and deficit dove, will do the heavy lifting for congressional Republicans.

The proposed federal tax reduction “framework” includes business tax and personal income tax decreases and increases. The devil is in the details and there are very few details. Proposals in the tax plan blueprint also appear to be evolving. The Urban-Brookings Tax Policy Center estimates the Trump tax plan would reduce federal revenue by $2.4 trillion over 10 years and $3.2 trillion over the second decade.

In 2018, all income groups would see their average taxes fall, but some taxpayers in each group would face tax increases. Those with the very highest incomes would receive the biggest tax cuts. Business income tax provisions would reduce revenues by $2.6 trillion in the first 10 years and elimination of estate and gift taxes by $240 billion while individual income tax revenue would increase by $470 billion over the same period.

Overall, the Institute on Taxation and Economic Policy estimates that 78 percent of the tax cut would go to less than 1 percent of Connecticut taxpayers.

For businesses, lowering corporate rates and capping taxation of non-corporate business entity pass-through income could be an economic stimulus for Connecticut — especially new enterprises. Unfortunately, none of it is actually tied to reinvestment in productivity or jobs. The proposal also relies on significant revenue increases from eliminating yet-to-be specified business tax credits and other benefits.

Ironically, the Trump proposals do even more to put America last by increasing tax incentives for businesses that locate or structure their profits off shore. Finally, repeal of the federal alternative minimum tax would be a big windfall for folks like Trump, assuming he turns out to be a federal taxpayer at all.

Proposed repeal of the federal estate tax would benefit only the two-tenths of 1 percent of all estates that would have liability under current law.

For personal income taxes, the result would be very regressive. According to the Urban-Brookings Tax Policy Center, taxpayers in the bottom 95 percent of income would see only modest tax cuts averaging 1.2 percent or less. The largest benefit would be for taxpayers in the top 1 percent who would pay 8.5 percent less.

To the extent they are paid for at all, these tax cuts are offset by big tax increases because personal exemptions and most itemized deductions would be eliminated. Connecticut, like most other “blue” states, will be especially hard hit by losing over $2 billion in state and local tax deductibility — most disproportionately for middle-income taxpayers.

Finally, the tax rate would actually increase for lowest-income taxpayers. For these taxpayers as well as many more lower- and middle-income families, increases will not likely be offset by a proposed higher standard deduction and child care credit because the current personal exemption for families with multiple dependent children would be eliminated.

Now, if you followed that last paragraph then you are ready to follow the Trump tax plan. But keep your eye on where they hide the pea next.

Kevin Sullivan is Connecticut's commissioner of Revenue Services.