State Governments

Another Winner From Tax Reform: State Governments

Taxpayers could end up sending hundreds of millions of dollars more to state treasuries as a result of slashing federal deductions and exemptions.

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John Greim John Greim Photography/Newscom

During a dinner in December 1974 at the Washington Hotel, so the story goes, Authur Laffer sketched a curved line on a cocktail napkin to demonstrate to Donald Rumsfeld how cutting tax rates could actually increase tax revenue.

The basic idea imparted to Rumsfeld, chief of staff for then-President Gerald Ford, (and other Republicans attending dinner that night) would serve as the basis for nearly every GOP-backed tax proposal since—including the Tax Cuts And Jobs Act, signed into law by President Donald Trump on Friday.

The so-called "Laffer Curve" makes a solid, important argument for reducing tax rates and letting Americans keep more of their own money. As a practical matter, it lets Republican lawmakers have their cake and eat it, too, by promising economic growth, fatter worker paychecks and more government revenue. It doesn't always work out. No matter how much Republicans wish for the Economic Growth Fairy, not a single analysis of the Tax Cuts And Jobs Act projects that economic growth will cancel out the $1.5 trillion in tax cuts included in the bill.

The impact at state capitols, though, could be quite different. In all, states figure to be one of the big winners from federal tax reform—they stand to collect a windfall of cash without having to make any change in their own policies. Some state policymakers are already figuring out what to do with that bounty. In some places, that will be an added dose of good news for taxpayers.

The passage of federal tax reform could mean an increase of between $150 million and $200 million annually in state revenue in Oregon, state economist Mark McMullen told the Oregon Senate Committee on Revenue and Finance earlier this month. And they are in line with what is being seen in other states.

"These are big numbers, and catching our attention," McMullen said. "In the past, when we've seen big federal changes to tax law—in the Reagan era and the Bush tax cuts—both of those turned into real significant boosts in terms of Oregon's own source of revenue."

The same is true in Maryland, where Gov. Larry Hogan's administration expects state tax revenues to increase by "hundreds of millions of dollars a year," according to The Baltimore Sun.

The relationship between federal taxes and state tax revenue can't quite be reproduced on the back of a cocktail napkin, but the correlation is a strong one.

Taxpayers in 36 states begin their state returns with their federal gross or taxable income, says Joseph Bishop-Henchman, vice president of the Tax Foundation, a tax policy think tank based in Washington, D.C. Nine states have no income tax, leaving just a handful of states with no direct connection to the federal tax code.

The changes wrought by the federal tax bill generally broaden the income tax base by eliminating or reducing deductions for individuals and businesses. Eliminating those exemptions and deductions at the federal level will increase taxable income amounts. Unless states follow suit by reducing their tax rates, the result will be a larger level of taxable income for state-level taxpayers, McMullen says.

An expanded corporate tax base and one-time repatriation (under the federal tax reform, corporations can pay a one-time tax to bring $2.6 trillion in overseas assets) will also boost state tax revenues as those assets suddenly reappear on businesses' tax returns.

"States will receive a windfall from this, although it will be uneven based on where international companies have state tax liability," Henchman says.

Doubling the standard deduction will also impact states. Twelve states conform with the federal standard deduction, and will see lower revenue as a consequence and 10 states have a personal exemption eliminated entirely in the federal tax bill, so is a net wash for the most part, says Henchman.

And what about the much-discussed reduction of the state and local tax (SALT) deduction in the federal tax code? Taxpayers in high-tax states will be allowed to deduct only $10,000 for property, income, and sales taxes on their federal return.

That means some taxpayers in those high tax states will see a larger federal tax bill in future years, but the change will not affect state revenues at all. In fact, if the loss of the SALT deduction encourages more taxpayers to take the standard deduction instead of itemizing deductions, it may tip a little more revenue into state coffers, The Tax Foundation estimates.

Hogan, a Republican, has called for changes to state policy to prevent residents of Maryland (one of those high-tax states where taxpayers will get whacked by the elimination of the SALT deduction) from facing higher tax bills. Hogan has not yet released a detailed proposal, but he told the Sun last week that his proposal would return to taxpayers any additional state revenue received as a result of the loss of federal deductions and exemptions. A formal proposal to the state legislature is expected in January.

In Iowa, Senate Republicans and the state Treasury Department are reportedly crafting a proposal to overhaul the state tax code by reducing the number of tax brackets and expanding the state sales tax base. The proposal would rely on increased state tax revenue from the federal tax changes to offset state tax reform.

Most states are still assessing how federal tax reform will affect their bottom lines and their taxpayers' wallets. Still, for all it's drawbacks, the federal tax changes passed this year could set-off a string of policy changes at the state level that will benefit taxpayers—or, at the very least, keep more of their tax dollars in state capitols, as opposed to being sent to Washington, D.C.

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43 responses to “Another Winner From Tax Reform: State Governments

  1. But, you can’t really know for sure what side of the curve you’re on.

    That’s just one more reason why you should always raise taxes.

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  2. The so-called “Laffer Curve” makes a solid, important argument for reducing tax rates and letting Americans keep more of their own money.

    That’s literally what fascists do. Literally.

    Jokes aside, I find it fascinating that leftist snowflakes continue to call the Trump Admin. a “Fascist Regime” considering he keeps doing things that are the opposite of fascist, like deferring legislating to the legislature, regulatory roll-back, and general ceding of power from the presidency. Meanwhile leftists are protesting against freedom of speech and engaging in outright fascist tactics in attempting to forcibly silence opposition. But we all know leftists project. It’s what they do.

    1. Everybody projects. The difference is that leftists assume everybody else is as helpless as they are and can’t fathom personal responsibility; whereas rightists assume everybody is personally responsible and can’t fathom irresponsible people.

      Libertarians don’t really care and just wish they’d all leave everybody alone to their own personal stew.

      1. At least the people o the right don’t want to rule everyone’s lives. The progressives ultimately represent an existential threat. For them it’s a short trip to Stalinism, or the killing fields of Pol Pot. They already want an end to free speech and advocate imprisoning ‘climate deniers’. From there its a quick jump to kind of gulags for anyone who dares to disagree with them.

        1. if 97 fireman told you your house was on fire but 3 said your thermostat is broken whom advice are you heading?there is no such thing as deniers.its a fact or it isnt.,,,the fact is 97 fireman are telling you your home is on fire..not a perfect analogy but close enough

          1. Actually its a terrible analogy. A fire is immediate and directly observable. Climate change is subtle, slow moving, and its long term effects dependent on complex modelling that has a worse track record than models predicting stock market prices.

            It doesn’t help that most enviro-catastrophe predictions (the Club of Rome crap, Global Cooling, Peak oil) all featured every lefty’s wet dream…fixing the problems all required a complete reorganization of society and a radical increase in government meddling in our lives, while real, practical solutions are demonized.

            It almost makes you wonder if there are motives behind the Climate Change movement that aren’t especially altruistic.

            1. My favorite observation on the politics of climate change come from an electrical engineer friend of mine: “If the left were serious about fixing the climate, they’d be giving the problem to engineers, not politicians and researchers.”

              The models have lousy track records, and we keep putting policy in the hands of people who want to make policy instead of people who solve concrete problems for a living.

            2. lets try this.we know that co2 has a warming effect.we know that co2 is increasing.we know where the co2 is coming from.we know sea levels rise is occurring..we know the poles are warming at amazing rates..now which one of the above knowns do you not accept as a fact…

          2. You should state all the known facts, like more than half of those 97 firemen are verifiable liars.

          3. More like, 100 firemen show up at your house. 10 enter your house and inspect. 7 come out and say there is a fire 3 said your thermostat is broken. The Other 90 get back in their trucks and leave.

            1. and 5 of the 7 who claimed it was on fire are yes men trying to keep their jobs

          4. How are things in Lowell, Joe?

          5. First, if you read where the “97” comes from your analogy would be 97 firemen agree the house is warm.
            Second, you have to change the word “fire” to something like combustibles possible warm because “fire” was always wrong.
            Third, as for the fire – how many of the 97 are starting the fire in a small room and saying look here? Not that anyone would fudge data
            Fourth, you would have to predict the fire would never go out! Ever (Like London would never see snow and the ice will vanish!)
            Five, if the house is on fire, why do most of the firemen have their feet up watching TV?

            Your analogy, much like your grasp on science is lacking.

            1. grasp?your playing with a analogy?so you perfer 97 trained brain surgeons say you have a tumor and must be removed,you find 3 whom claim the other 97 surgeons are just in it for the money.now go home and carry on???,,,,,,,,,,,,,,,,,,and to top it off you got those 97 surgeons advice from 97 different countries..so either its a world wide conspiracy so the surgeons get paid,all their data is wrong,and the 3 others are correct..seems odd,,,,,,,,,,,and so please tell me where my lack is

        2. Its almost like you people really believe the bullshit you type.

          You’re *that* fucking deranged.

          People on the right dont want to “rule everyones lives” from your view because *all of the regressive shit they want to force on people is shit you agree with*

          As long as you pretend to be straight, are white, pretend to be “christian”, are conservative, stay very very wealthy, and remain a loud mouthed asshole with *no* empathy for anyone brown, poor or foreign, then SURE… the right wing is *fine* with how you live your life!

          1. Awww the crying of the left. Show us where the mean comment touched you.

            Let’s see

            Straight – gosh, your right. I mean just last week in America a non-straight person was beheaded…or stoned…

            Yep everyone is very very wealthy. All those dumb hicks (your words) in flyover country are just living it up!

            Brown or foreign – funny because the right likes immigrant. Legal. It’s the left that wants to import a new slave class. Hey question for you lefty – why do the people at the south border get preference to come in? Why not Africans who are starving? India? Let’s I check, Europe decides who to let in.

            The only people who are forcing “shit” is you. Everything is offensive. Ideas are scary. If you don’t agree, you are a racist. How’s your lords doing with their forcing of sexual harshment btw?

          2. Its almost like you people really believe the bullshit you type.

            Dumbfuck janon cries like a bitch–must be Hihnsano’s “accident”.

  3. The so-called “Laffer Curve”

    OK, pay very close attention you stupid fucking left-wing, fake libertarian piece of shit and maybe there’s a chance that you’ll actually learn something: it’s not the “so-called ‘Laffer Curve'”. Nobody with an actual brain in their head disputes that the Laffer Curve is a real thing that exists! If it didn’t exist, that would mean that all governments would be best served by setting their tax rate at 100%.

    All that the Laffer Curve says is that there’s a certain optimal “sweet spot” point at which government revenue will be maximized, and that if you go higher or lower revenue will decrease. No serious person can dispute this; it’s plain old common sense. What we DON’T know is exactly where that sweet spot is, plus it’s extremely that the curve varies from country to country and economy to economy, and quite possibly even within one country depending on the current state of the market and general economy. You could definitely make a plausible argument that we’re currently on the lower tax side of the curve, but you can’t argue that it doesn’t exist.

    I hope that you learned something today so that you’ll avoid making a complete fool out of yourself in the future.

    1. Gee, you stupid fucking right-wing piece of shit, maybe you should read the article:
      “The so-called “Laffer Curve” makes a solid, important argument for reducing tax rates and letting Americans keep more of their own money.”
      Is it because your family is a bunch of idiot bleevers that your mom didn’t have an abortion? The world would be a better place if she had.

    2. It’s called the “Laffer Curve” because a guy named Laffer articulated the idea to some other guys who passed some legislation and shit. I don’t see anywhere in the article any claim by Eric that it isn’t a “real thing”.

      “The so-called ‘Laffer Curve’ makes a solid, important argument for reducing tax rates and letting Americans keep more of their own money.”

      Maybe you’re put off by the term “so-called” or maybe you didn’t read the rest of the sentence?

    3. And if the issue was “so-called”, it’s “so-called” because Laffer wasn’t the first to come up with the idea, but it’s been attributed to him in modern economics.

    4. Or 0%, you stupid piece of shit.

  4. the problem with the last statement of the article is that the spending is no more responsible in state capitals than in the Nation’s capital. I’d love to call it a good thing, but I just can’t, when I see the foolishness in my state.

  5. is it odd that most donor states will see a tax increase

    1. They’re giving these states what they want–higher taxes. Why should they complain?

  6. The moral of the story is that Donald Trump did CA a favor? A state that’s possibly headed to a mild recession?

    What’s wrong with that guy?

  7. I don’t see it. If I recall correctly, state taxes are deducted from the federal tax calculation. So how would a state benefit? I could see it if fed tax is first.

    1. “I don’t see it.” You’re bad at math?

    2. Headache, from the article:

      “The changes wrought by the federal tax bill generally broaden the income tax base by eliminating or reducing deductions for individuals and businesses. Eliminating those exemptions and deductions at the federal level will increase taxable income amounts. Unless states follow suit by reducing their tax rates, the result will be a larger level of taxable income for state-level taxpayers.”

      1. Yeah, CapRoad, I had a couple brain-freezes trying to understand those words and others, too.

        But my immediate reaction was that a major point Eric missed was that there’s an assumption of ‘ceterus paribus’ throughout the article AND in the minds of Federal AND State tax agencies!

        If the Feds ‘let us keep more of our money’ and the immediate result is that high-tax states will collect MORE of our money as a result… well, kids, THAT alone will cause uprisings in at least a few states by newly-disgruntled state taxpayers!

        So some new equilibrium will be sought, even if it takes a few years to play out!

    3. State and local taxes (SALT) are only deductible if you itemize deductions. Except for the highest brackets, the majority of taxpayers can’t use the SALT deduction because their itemized deductions are less than their standard deduction. (That was $6350 single/$12700 married filing jointly in 2017, and will be $12,000/$24000 in2018).

      E.g., my SALT taxes are under $2,000; if they are 100% deductible, they wouldn’t go very far towards balancing out the standard deduction, and in the 15% tax bracket would save less than $300. That’s likely not even worth the time filling out the form to claim this deduction.

      1. To use this deduction, one must either:

        -Have a very high income so the SALT taxes are also high, and you must itemize due to high expenses or to AMT liability. (Wait, weren’t the progressives complaining that the tax changes favor the wealthy?)

        -Have bought a house with a mortgage much more expensive than they can afford, so their mortgage interest deduction is sky-high. (In other words, financial idiots. Allowing this deduction in the first place was a mistake, and it should be gradually phased out.)

        -Have sky-high medical expenses. I do have sympathy for someone in this boat, but remember that the only the expenses exceeding 10% of your income are deductible. My medical insurance pays nearly everything above a certain point, and that point is below the 10% mark, so to even get the first dollar of tax deductions from medical expenses, I’d need to be paying for treatment not covered by insurance and not paid from my HSA, after paying nearly $9,000 a year for the insurance. Anyone not rich who benefits from this deduction is probably bankrupt already from excessive uninsured medical expenses and from missing work.

      2. -Or have some other itemizable expense at a very unusually high level. Something like paying for full-time job-related college classes at a for-profit university with no employer reimbursement, or somehow running up a $20,000 bill to move to a new job location.

        It seems to me that, except for those with a very high income, anyone who has to itemize has problems much bigger than their tax savings from the SALT deduction. The majority of taxpayers couldn’t use this deduction in the first place, and with the near doubling of the standard deduction, that group will grow. Finally, trading the higher standard deduction for things like SALT deductions benefits low and middle income taxpayers and hurts the rich (and the tax accountants and lawyers) – which makes me wonder which tax bracket the “progressives” moaning about this are in.

  8. Or, in those 36 states, the new tax law *doubly* encourages scofflaws to cheat more on 1040s so their state taxes will be lower, too. All the more so since the traditional deduction of state income tax on 1040s seems to be disappearing.

    1. All the more so since the traditional deduction of state income tax on 1040s seems to be disappearing.

      No, you can deduct up to $10K in state, local, and property taxes combined. That’s still a pretty fat deduction for 99% of us, even if you live in high-tax utopias. The only people who are going to get cornholed on that are rich people and homeowners with million-dollar mortgages

  9. Oh, boy, now they can hire more cops to kill more children. Open the champagne, Bubba.

  10. So essentially, those expecting a reduced tax burden from the federal govt are also going to see increased state taxes? How is that helping?

    1. RTFA. It’s not higher state tax rates, but an expected economic boost from the federal tax reductions and simplifications, which gives the states more income and sales to tax.

  11. There’s certainly a big ‘supply’ of tax scammers. How about some labor supply side support instead?

  12. As a resident of the Empire State, I do not want to hear another goddamned word out of Chuck Schumer’s mouth about how the forthcoming federal infrastructure spending plan must be 100 percent public.

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