Category Archives: Taxation

Employee Benefits—Tax Cuts and Jobs Act of 2017

Source: Mark E. Bokert and Alan Hahn, Employee Relations Law Journal, Vol. 44, No. 1, Summer 2018
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On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017 (TCJA), which significantly amends the Internal Revenue Code of 1986 (Code). While the main focus of the TCJA may be on lowering corporate and individual tax rates, the TCJA also includes meaningful changes in the area of employee benefits and executive compensation, including changes to the Patient Protection and Affordable Care Act (ACA), the tax treatment of how public companies and tax-exempt organizations pay their executives, and the tax treatment of various fringe benefits. Among the changes in the benefits and compensation arena, the TCJA effectively repeals the ACA individual mandate by reducing the individual mandate penalty to zero, effective as of January 1, 2019; prohibits public companies from deducting certain performance-based compensation paid to their top executives; and provides that nonprofit organizations are subject to excise taxes for certain compensation packages paid to their highest paid employees.

Some expected changes impacting benefits and compensation never came to fruition. For example, while some earlier drafts of the TCJA included a repeal of Section 409A of the Code and the expansion of Health Savings Accounts (HSAs), the final law does not include any meaningful changes in these areas.

This column provides an overview of some of the changes enacted by the TCJA that impact the employer-employee relationship. Employers will want to work with their legal counsel to understand the nuances of the TCJA to determine whether any of their employee benefits plans or executive compensation arrangements should be amended in light of the TCJA and whether they should consider revising benefit packages offered to their employees.

Trump’s tax cuts have so far failed to deliver on one key promise

Source: Pedro Nicolaci da Costa, Business Insider, August 3, 2018

– The Trump tax cuts were pitched as a boon to US workers, with the administration arguing their benefits would trickle-down into rising wages.
– While the tax cuts have meant some Americans are keeping more of their paychecks, no discernible gains in wages have materialized thus far.
– Real average hourly earnings (adjusted for inflation) for all employees on private nonfarm payrolls were totally unchanged in June from one year earlier.

Related:
GDP Is Growing, but Workers’ Wages Aren’t
Source: Michael Madowitz and Seth Hanlon, Center for American Progress, July 26, 2018

President Donald Trump recently said that the U.S. economy is “stronger than ever before” and points to his tax plan as one of the major reasons why.1 But the fact is that workers are not getting ahead in the Trump economy. Official data released in recent weeks have shown that workers’ wages are flat or even slightly down, in real terms, over the last year.2 These data fly in the face of many tax plan boosters who have claimed that the bill’s passage has already been a boon to middle-class workers….

Connecticut in Crisis: How inequality is paralyzing ‘America’s country club’

Source: Jared Bennett, Center for Public Integrity, July 25, 2018

The state is caught in an economic straitjacket and there’s no easy way out…..

…. Blue chip companies like General Electric have either left or are threatening to leave. A yawning budget deficit continues to loom over the state, amplified by some of the nation’s most glaring economic inequality. Greenwich, home to hedge funders and Manhattan corporate titans, and the Norman Rockwell suburbs of Westport, New Canaan and Darien share few priorities with Hartford, New Haven and Bridgeport, gritty cities struggling with searing poverty and fiscal disaster. Connecticut’s political leaders must choose between what seem like equally rotten options: cut services, and push more burden onto the urban poor, or hike taxes, and risk repelling both the suburban rich who pay much of the freight and new businesses that might consider moving here. Put simply, Connecticut is in a bind with precious little room to maneuver.

Connecticut’s troubles are extreme but hardly unique. The recovery that has entrenched Connecticut into the haves and have-nots has been unequal in other regions as well – from Florida to California and down to Texas. As the stock market climbs but wages remain relatively flat, the Constitution State serves as a troubling bellwether of national priorities that seem to favor wealth creation for the few before investments in the broader economy. ….

Kansas Supreme Court rules in favor of K-12 public schools, a credit positive for districts

Source: Denise Rappmund, Matthew Butler, Moody’s, Sector Comment, July 18, 2018
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On June 25, the Kansas Supreme Court ruled that the Kansas (Aa2 stable) state legislature’s latest K-12 public school funding bills still do not meet the state’s constitutional standards for adequately funding public education. This ruling is a credit positive for Kansas school districts because it will mean a modest amount of additional operational revenue to districts, on top of the $643.9 million in additional funding over the next five-year period covered by the legislature’s current funding plan. Further, the court has also stated that the current plan is to remain in temporary effect with a stay on the ruling through June 30, 2019, during which time the state will need to re-submit to the court a remedy that will bring funding up to state standards for student achievement.

The Retail Sales Tax in a New Economy

Source: John L. Mikesell – Indiana University, Sharon N. Kioko – University of Washington, presented at the Brookings Institution’s 7th annual Municipal Finance Conference, July 16-17, 2018

For the second half of the 20th century, the retail sales tax was the largest single source of tax revenue to state government and the second largest source for local governments. Born out desperation during the Great Depression, the retail sales tax became the single largest source of tax revenue for the states by 1947. While consumption is an indispensable measure of household ability to pay, the U.S. retail sales tax fails to fully capture that measure in its taxable base. As a result, the tax is not economically neutral, horizontally equitable, robustly revenue-productive, or simple to collect. Since its adoption, political, social, and economic forces have created a tax that is both “too broad” or “too narrow”. We explore patterns of change and their impact on the retail sales tax. Specifically, we explore how changes in consumption, policy, and technology, particularly the internet, have made the retail sales tax less neutral, equitable, administrable, and productive. We also examine which policy options have been successful and what policy changes should be encouraged.

Related:
View Kioko’s slides
View Gordon’s slides
Tracy Gordon (Urban Institute)

Federal Tax Cuts in the Bush, Obama, and Trump Years

Source: Steve Wamhoff, Matthew Gardner, Institute on Taxation and Economic Policy (ITEP), Analysis, July 2018

From the introduction:
Since 2000, tax cuts have reduced federal revenue by trillions of dollars and disproportionately benefited well-off households. From 2001 through 2018, significant federal tax changes have reduced revenue by $5.1 trillion, with nearly two-thirds of that flowing to the richest fifth of Americans, as illustrated in Figure 1.

The cumulative impact on the deficit during this period is $5.9 trillion, including interest payments. By the end of 2025, the tally of tax cuts will grow to $10.6 trillion. Nearly $2 trillion of this amount will have gone to the richest 1 percent. By then, the total impact on the deficit will be $13.6 trillion, including interest payments.

This analysis does not include hundreds of billions of dollars in so-called tax cut “extenders” for corporations and other businesses that Congress has periodically enacted under each administration. More detailed figures are provided in the tables in Appendix I…..

Related:
Data Available for Download

Institutional Arrangements for Public Library Funding and Spending

Source: Carol Ebdon, Ji Hyung Park, Aimee L. Franklin, Jonathan Moore, American Review of Public Administration, Article first published online: July 3, 2018
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From the abstract:
Wide variation in institutional structure and funding patterns in public libraries make this government function useful for exploring the effect of these differences on expenditures. Based on literature related to willingness to pay, special districts, and fiscal illusion, we hypothesize that libraries with taxing authority and more revenues from nonlocal sources will have higher levels of spending. We use data from an Annual Public Library Survey, and U.S. Census data, in ordinary least squares (OLS) regressions for 2007 and 2010. We find that taxing authority leads to increased spending, as expected. However, the results of funding sources are contrary to expectations; relative reliance on nonlocal sources is generally associated with lower levels of spending. This may be due to “crowding-out” of local sources, and there may also be some effect from reduced state aid following the Great Recession.

Corruption and Tax Structure in American States

Source: Cheol Liu, John L. Mikesell, American Review of Public Administration, OnlineFirst, Published June 27, 2018
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From the abstract:
We examine the extent to which public corruption influences the tax structure of American states. After controlling for other tax structure influences, we find that states with greater measured public corruption have more complex tax systems, have higher tax burdens, rely more heavily on regressive indirect taxes, and have smaller shares of their tax burdens with initial impact on business. These are significant structural impacts on the tax systems.

Public K-12 school districts – Oklahoma – State’s top court rejects challenge to taxes for teacher pay increases, a credit positive

Source: Adebola Kushimo, Roger S Brown, Alexandra S. Parker, Moody’s, Sector Comment, June 27, 2018
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On June 22, the Oklahoma (Aa2 negative) Supreme Court rejected an effort to nullify a legislative package that increases state taxes to provide teachers with a pay raise. The court refused to permit a referendum that would have given voters a chance to block the tax increases, which include tax hikes on gasoline and oil production. The ruling is credit positive for school districts because it preserves state funding for the teacher pay increases, which came as teachers threatened to strike earlier this year and eventually did. The activists opposing the tax increases could still mount another effort to hold a referendum, hoping voters will overturn the tax hikes. The court noted that they have until July 18 to submit a new list of signatures that could lead to a November vote…..

Internet Sales Tax Ruling Helps States Avoid Revenue Erosion In The New Economy

Source: David G. Hitchcock, S&P Global Ratings, June 21, 2018
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S&P Global Ratings believes the U.S. Supreme Court’s decision allowing states to require out-of-state online retailers to collect sales tax will have a beneficial effect on long-term state credit quality. However, the immediate credit effect may be muted. The Wayfair decision, will help stem state tax erosion in a changing economic environment.