When the House Ways and Means Committee met to consider its bill to revamp the U.S. tax code, a towering stack of volumes titled “Income Tax Regulations” were piled on the dais.
Those volumes spoke a thousand words — or, more accurately, a few million of them — about the daunting task confronting Congress as it wrestles with tax reform. The mind-numbing complexity of the U.S. tax code, with its byzantine provisions affecting almost every aspect of the American economy, makes tax reform a challenge even for those few who can honestly claim to understand every facet of the code.
But there is one overarching principle that should guide Congress through this maze: Middle-class taxpayers should be made no worse off by tax law changes, and no state or regional or economic sector should be stripped of tax relief simply to benefit another. Yet that is exactly what Congress may do, unless reason prevails in the next few weeks.
This tax overhaul effort began with worthy goals: to improve American competitiveness by reforming the corporate tax system to bring it into line with other industrialized nations; to repatriate trillions of dollars stashed in overseas tax havens so that money can be used to power our economy and help rebuild critical infrastructure; and to provide at least some modest tax relief to the hard-pressed middle class.
As a senator who served in Congresses that successfully navigated several tax reform efforts without sinking them, I also appreciate that every senator and representative has a duty to plead for the interests of his or her constituents. But that must be balanced by the responsibility to appreciate the needs of other states’ constituencies.
As my former colleague Sen. Pat Moynihan regularly pointed out, New York state consistently delivers far more tax dollars to the U.S. Treasury than it gets back from Washington, due in large part to the major federal tax revenue generated by Wall Street. Moynihan and I used this fact to staunchly defend New York’s financial interests when tax bills came before Congress. We didn’t attack tax provisions benefiting other states, but neither did we let New Yorkers’ taxes increase to benefit those in other states. We worked on a bipartisan basis to protect our state.
Yet under current tax reform proposals Congress is considering, there’s now a real possibility that New York’s contribution to federal revenues will become even more unbalanced, adversely affecting the state. Both the House and Senate versions of the tax bill contain provisions reducing the allowable federal deduction for state and local taxes. The proposed House bill would cap this deduction at $10,000, and the Senate bill would eliminate it altogether.
For many New Yorkers, federal income taxes would actually go up, not down, if either of these bills were to pass. Adding injury to insult, the House bill would eliminate the full home mortgage interest deduction. Taken together, these changes could lower home values by up to 20 percent and send the U.S. housing industry — which accounts for one-sixth of the national economy — into a tailspin.
The irony is that if the proposed tax reforms were to work as advertised by supporters, the U.S. economy would instead grow substantially, which would mean that Wall Street would thrive, and thereby generate even more tax revenue originating here to be sent to Washington, while New Yorkers would pay more in federal taxes. So, if the proponents of tax reform are right, New York would suffer a double penalty.
There is a way to address this inequity. Congress could act responsibly, trimming some proposed tax cuts and closing glaring tax loopholes. For instance, rather than repealing the estate tax or the alternative minimum tax entirely, as proposed, more modest adjustments in these taxes could be made. Likewise with the proposed corporate tax reduction. As Sen. Orin Hatch, chairman of the Senate Finance Committee, which is handling the tax bill, has indicated, a corporate rate somewhere between 22 and 25 percent would accomplish the goal of reducing businesses’ tax burden without shifting it to individual taxpayers.
Finally, closing the notorious “carried interest” loophole, which allows hedge fund managers to pay a capital gains tax rate of 23 percent rather than a 39 percent income tax, like most taxpayers, could raise billions per year. Taken together, these savings could be applied to restoring the full deduction for state and local taxes.
Having been involved in successful tax reform efforts, I know there’s a way to go about it fairly and equitably. It’s been done before, and it can be done again. It simply requires Congress to act in the best interests of all rather than some, which in turn requires bipartisanship and compromise. That’s what taxpayers should expect.
Al D’Amato, a former U.S. senator from New York, is the founder of Park Strategies LLC, a public policy and business development firm. Comments about this column? ADAmato@liherald.com.