Though we’re an increasingly divided society, at the community level we do still seem to have the ability to get along and even to listen to each other’s ideas, sometimes. I’d like to share a few brief thoughts on how Congress’s proposed “Tax Reform Bill” might impact our community, as best I understand the current details.
Clearly, the heart of the plan by any reckoning is the lowering of the corporate tax rate, meant to bring the US rate closer to other developed countries, and generate growth. This is easily the largest portion of the bill’s 1.5 trillion dollar cost over ten years. The problem is not only that it generates little growth, but also that while US corporate “statutory” rate is 35%, the “effective” rate (actually paid after all the deductions and credits) is more like 27% - right about the global developed country average already.
Even under the optimistic “dynamic scoring” requested by the Republicans, Congress’s own Joint Committee on Taxation says that only one-third of the bill’s cost is recouped by growth stimulus. That still leaves a trillion dollar addition to the debt over a decade, another trillion (or more) the decade after that, and so on. Because while all individual tax cuts expire in 2025, the corporate cuts are permanent.
That debt will need to be paid someday, by my three daughters, and by your children, and all of those in school in Decorah and Winneshiek County today. That burden appears to me to perpetuate and even increase the challenges to local economic health, and creating opportunities for our kids as they grow up.
But wait, might the tax plan help our community prosper by benefitting our small businesses and farmers? Not so fast. I own and operate a small farm business, and – like most small businesses – report income on personal tax returns.
The vast majority of farms and small business, in fact, are pass-through entities such as partnerships, LLCs, or sole proprietorships where corporate tax rules (and so large cuts) don’t apply. National business groups have raised this point, and the American Farm Bureau Federation’s “Agriculture and Tax Reform” web page says the same: “Any tax reform proposal that fails to treat those taxed under the individual and corporate tax codes fairly will not help, and could even hurt, the bulk of agricultural producers who operate outside of the corporate tax code.”
Yes, the proposed legislation does include a significant deduction on pass-through business income, but the real question is whether it “treats those taxed under the individual and corporate tax codes fairly”. The benefits for pass-through businesses are small relative to the corporate cut, and if the final version follows the Senate version, those benefits to pass-through entities will expire (remember, the corporate benefits are permanent).
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That doesn’t sound like a fair shake to small businesses and small communities. When small business gets a little, and big business gets a lot, the competitive advantage of big business just keeps growing … and small business and small communities just keep shrinking. Uff da.
Speaking of business challenges, the tax plan is also a serious threat to the wealth of church and charitable businesses (aka non-profits) that serve our communities in so many critical and wonderful ways. This is because the proposed doubling of the standard deduction means that 30 million Americans will no longer benefit from itemizing deductions for charitable giving, likely resulting in a drop of 10-20 billion dollars per year in giving (a figure supported by that same Joint Committee on Taxation).
“This is a huge step toward eliminating the benefits and incentives of the charitable deduction altogether,” according to the national Faith & Giving Coalition. “It also is a major step toward reversing our nation’s policy favoring and incentivizing charitable giving, which has been working well for over 100 years. This is devastating for our charitable organization and organizations like ours throughout the country.”
That sounds like a serious negative impact on our amazingly diverse and impactful non-profit sector, one which even traditional Iowa generosity will have a very difficult time overcoming. Another apparent check against our communities.
Finally, what about the individual impacts, don’t I LIKE the idea of a tax cut? Like the changes for small businesses and farms, the current proposals giveth to individual taxpayers with one hand and taketh away with the other. The best example is the doubling of that aforementioned standard deduction, from about six or twelve thousand (for single/married filers) to about twelve/twenty-four thousand.
That sounds GREAT for so many of us in rural America and small communities that don’t currently benefit from itemizing (and it even sounds simpler, too!) But wait, as the standard deduction goes up (and the child tax credit, though less), the personal exemption – worth about four thousand per parent and dependent – is eliminated. So a married couple with three kids (yep, that’s my wife and I) might see an increase of $12,000 in the standard deduction and a loss of $20,000 in the personal exemption, hmmm. More kids? More hmmmm.
I mentioned fairness in the business discussion. Promoting fairness and combating growing inequality among taxpayers sound to me like pretty strong community values. Yet as of this writing the final version appears to cause 13 million Americans to lose their health insurance, while simultaneously giving six-figure tax cuts to those making over $10 million/year. Is that the right thing to do?
What’s the upshot? I think many – Democrat or Republican – in rural America and in Iowa’s small towns have felt like the deck is increasingly stacked against our communities and local economies. Our wealth and our kids leave for greater “opportunity” elsewhere.
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The fundamentals in the current tax “reform” plans appear, sadly, to continue stacking that deck against our communities. Sure we’re tossed some crumbs, but the steak is tossed to the corporate world, and their relative competitive advantage continues to grow while wealth, health, and opportunity continue to flow out of our communities.
This is one more headwind we’ll have to work very hard together to overcome. Arts and culture, small business development, support for our nonprofits, the creation of municipal utilities to own and control fiber and electric services … all this and more can contribute to community vibrancy, but can only do so much to counter the major structural and economic challenges to our communities.
The current tax bill sure doesn’t help. If you disagree, I’m interested in your thoughts. If you agree, it is not too late to be heard.
l Andy Johnson is director of Winneshiek Energy District, and has worked in community development and stewardship in the US and abroad for over 20 years. Johnson, his wife and daughters raise Christmas trees, grass-fed cattle and sheep on their farm in Winneshiek County.