WASHINGTON (AP) — It’s a Christmas gift the middle class might want to give back in a few years.
The Republican tax plan bestows an initial infusion of cash on nearly every taxpayer next year. That extra income is likely to please millions of households, support consumer spending and perhaps give the economy a short-term lift.
Ordinary households should enjoy it while it lasts. Over the next several years, multiple analyses of the bill have found, those tax cuts will gradually fade — and then morph into tax hikes for a majority of people who are solidly middle class.
Why?
Two features in the tax bill — a child tax credit and a $10,000 limit on state and local tax deductions — won’t adjust to keep pace with inflation, thereby reducing their value each year. What’s more, the individual tax cuts are set to expire after 2025. And once the individual tax rates revert to their former levels, a stingier inflation gauge would raise taxes for most households.
President Donald Trump has largely sidestepped these trade-offs in promoting the overhaul he’s set to sign, a measure whose benefits largely favor corporations and wealthy individuals.
“The heart of our bill is a tremendous amount of relief for the middle class,” the president said Wednesday. “It will be an incredible Christmas gift for hard-working Americans.”
Trump has also said that “whoever” is president in 2025 would ensure that the expiring tax cuts for individuals are renewed. But doing so would cost heavily: The national debt would likely balloon by over $2 trillion — far more than the $1.5 trillion increase that lawmakers approved for the tax cuts — according to an analysis by the Committee for a Responsible Federal Budget.
The rising debt could eventually force spending cuts to social and educational programs that serve many who aspire to join the middle class. Trump and House Speaker Paul Ryan have both raised the prospect of reducing spending on social services next year, with Ryan specifically mentioning changes to Medicare.
Trump, Republican lawmakers and their allies are betting that higher take-home pay from the tax cuts will shore up public support for a bill that poll show a sizable number of Americans view unfavorably. They also appear confident that ordinary Americans will have no objection if corporations and the wealthy receive the bulk of the tax-cut gains so long as middle class households, on average, also receive some benefits.
More than 80 percent of taxpayers will receive a tax cut in 2018, according to an analysis by the nonpartisan Tax Policy Center. These tax cuts skew most heavily toward the top 5 percent of earners. This group — with incomes starting at $307,900 — would collect 42.6 percent of the tax cuts. By 2027, they would enjoy no less than 99.2 percent of the tax cuts.
By contrast, a majority of people earning less than $93,200 would, on average, absorb a tax increase in 2027.
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“The tax bill gives a big tax cut to corporations with the hope that, eventually, it will boost wages at the bottom,” said Elaine Maag, a senior researcher at the Tax Policy Center. “But it does seem a little counterintuitive that you would raise taxes on low- and middle-income families that are struggling.”
One reason that the tax bill favors the wealthy is how it would account for inflation. The current $1,000 child tax credit would double to $2,000. The credit would remain at $2,000 for eight years, without any adjustment for inflation, before reverting back to $1,000.
Some policy advocates note that the child credit wasn’t previously adjusted for inflation. But the expanded child credit helps offset the bill’s elimination of personal exemptions for children and parents that until now has reduced taxable income. Personal exemptions have been increased yearly to account for inflation — a benefit that will now end.
Nor would the $10,000 cap on deducting state and local taxes adjust for inflation. If the cap were adjusted for inflation at 2 percent, for example, it would likely have reached above $11,700 in 2025 rather than remain at $10,000.
Another factor in the likelihood of tax increases after 2025 is that the government would adopt a less generous measure of inflation. Rather than apply the traditional consumer price index as it now does, the IRS will start revising levels of taxable income with a measure that aims to anticipate consumer behavior: It assumes that people will limit the inflation in their daily lives by replacing costlier products with cheaper ones. But over time, this inflation gauge tends to understate inflation and would impose higher taxes on individuals.
Lily Batchelder, a law professor at New York University and former Obama White House adviser, argues that the inflation gauge is being changed to help finance the measure’s corporate tax cuts, which the bill makes permanent.
“It will result in more and more households owing more in taxes, and it will hit low-and middle-income families especially hard,” Batchelder said. “A family earning $20,000 to $30,000 will see their after-tax income fall by 1 percent on average. While 1 percent may not seem like a lot, when you are struggling to make ends meet and support your family, every little bit counts.”
Supporters of the tax overhaul counter that Americans will look past the fine print of the bill and judge it based on their own individual incomes, the likelihood of pay raises resulting from corporate tax cuts and the health of the economy.
“Americans right now are skeptical, really, of anything that comes out of Washington — you’ve got to prove it to them,” said Tim Phillips, president of Americans for Prosperity, a group backed by the Koch Brothers network of donors that helped campaign for the overhaul.
Phillips says he thinks middle class households will embrace the tax plan if their incomes start to climb and economic growth surges.
“What Americans will focus on is whether or not this tax cut actually makes them more prosperous and makes the country more prosperous,” he said.
So who wins and loses with the passage of this bill?
Among the tax plan’s winners:
The Trump organization
At least temporarily, companies with profits that double as the owner’s personal income would enjoy a substantial tax break. Consider the Trump Organization. It consists of about 500 such “pass-through” entities, according to the president’s lawyers. Rather than pay the top rate of nearly 40 percent, Trump would likely be taxed on these profits at closer to 30 percent.
The final bill also appears to specifically benefit the real estate sector, the bedrock of the Trump family’s wealth, with benefits extended to pass-throughs that own buildings but don’t pay wages to workers.
The president’s family didn’t receive every possible benefit. The estate tax on inheritances, for example, will stay in place, though it will apply only to the portion of a family’s estate that exceeds $11 million — twice the previous level — at least through 2025. And the alternative minimum tax, which is intended to prevent the wealthy from exploiting loopholes to avoid taxes, would stay in place as well, though its higher thresholds would also be temporary.
Energy drillers
It’s no longer off limits to drill in Alaska’s Arctic National Wildlife Refuge for oil and natural gas. President Barack Obama had sought to protect the 19.6-million acres, a home for polar bears, caribou, migratory birds and other wildlife. But under the Republicans’ tax plan, fossil fuel companies could tap into oil and gas reserves. Alaska Sen. Lisa Murkowski and other Republicans insist that drilling can be done safely with new technology while ensuring a steady energy supply for West Coast refineries.
Sports teams
Major sports teams will still be able to build and renovate their stadiums with tax-exempt municipal bonds. The House version of the tax bill had initially scrapped access to this form of debt by sports teams, a provision that drew objections from the NFL. But the final bill retains it.
Such tax-advantaged public financing should make it easier to have the Oakland Raiders, for example, move to Las Vegas and play in a new $1.9 billion dome. Forbes estimates the Raiders, owned by Mark Davis, to be worth $2.4 billion.
Major corporations
The tax rate for most companies would drop to 21 percent from 35 percent. This is a permanent rate cut, which, along with a shift to a lower rate on some foreign earnings, could help boost corporate profits. Not surprisingly, the stock market has soared in part over anticipation of these lower corporate taxes. The Standard & Poor’s 500 stock index has jumped nearly 24 percent since Trump’s election last year.
Tax lawyers
Rather than close loopholes, the tax bill appears to create more of them. Tax lawyers and accountants will likely be besieged by clients looking for professional guidance in restructuring companies and incomes to avoid taxes. In fact, tax experts and lawyers who reviewed a prior version of the tax bill outlined a slew of loopholes in a 35-page report in which it warned that the bill would “allow new tax games and planning opportunities for well-advised taxpayers.”
Many individuals and groups are likely to be on the losing end of the tax legislation. Among them:
The uninsured
The tax bill removes a penalty that was charged to people without health insurance as required by Obama’s 2010 health insurance law as a way to hold costs down for everyone. By eliminating this mandate, the tax bill will likely deprive 13 million people of insurance, according to estimates by the Congressional Budget Office.
The repeal of the health insurance mandate will help preserve revenue to pay for the tax cuts. The government would no longer have to subsidize as many low-income people receiving insurance. This change would generate $314.1 billion over 10 years, according to the Joint Committee on Taxation.
Commuters
It could get more expensive to ride the subway or park your car near work. Employers would no longer be able to deduct from their taxes the cost of providing parking or transit passes worth up to $255 a month to workers. Bicycle commuters would also lose their benefit from companies.
Technically, companies could still offer this benefit. But under the tax bill, they will lose the financial incentive to do so. Such a change could have the effect of reducing ridership on public transit and possibly increase costs for riders on rail and bus systems.
Homeowners in high-tax states
The bill imposes a $10,000 cap on taxpayers who deduct their state, local and property taxes — and the cap isn’t adjusted for inflation. Currently, there is no limit on how much in state and local taxes you can deduct. Some Republican lawmakers in such high-tax states such as California and New York voted against the bill because their constituents’ taxes could increase as a result of the provision, but the measure still passed.
Taxpayers after 2025
Most Americans would receive tax cuts initially. But the lower rates and a host of other benefits would expire after 2025. This effectively sets up an $83 billion tax hike for many millions of Americans in 2027. More than half of taxpayers would pay more in taxes that year, according to the nonpartisan Tax Policy Center.
What’s more, people’s taxes could continue to creep up because the plan will adjust the tax brackets at a less generous measure of inflation than it formerly did. The slower indexing for inflation amounts to a $400 billion tax hike between 2028 and 2037 that would help finance the lower corporate rates, Lily Batchelder, a New York University law professor and former Obama White House adviser, observed on Twitter.
Congress could decide years from now to extend the lower tax rates. But doing so would increase the deficit far more than the $1.5 trillion now being estimated by Congress’ Joint Committee on Taxation.
