Massive Spending Cuts: The Tax Act's Hidden Costs

Albin Lohr-Jones/Sipa USA via AP Images

A demonstrator holds a sign at a rally in opposition to the Republican tax bill held in Lower Manhattan

This article appears in the Summer 2018 issue of The American Prospect magazine. Subscribe here

The 2017 Republican Tax Act is plainly a raw deal for working America. Corporations keep their massive cuts permanently, but according to the Tax Policy Center, 53 percent of filers will actually pay more taxes in 2027 than they would have if the Tax Act had not become law. More than twice as many of those in the lowest income group will face tax hikes than will enjoy a cut. And by 2027, the law is projected to result in 13 million more Americans being uninsured.

But that kind of narrow view only scratches the surface. One has to look at the law’s hidden costs, longer-term effects, and the ripple effect on state revenues and spending.

In one provision that hasn’t received much attention, Republicans rejiggered the formula that the government uses to measure inflation. Known as Chained Consumer Price Index, this trick  will reduce the official measure of inflation. In turn, that will result in “bracket creep,” in which tax filers move to a higher tax rate without seeing the same boost in their real incomes. In the first ten years, the government will collect an estimated $125 billion more as a result, but over the following ten years, it will result in a tax hike of $500 billion. This change, which hits people of modest incomes harder, was adopted to help pay the costs of tax cuts for the rich.

Because this same measure is used to determine the Earned Income Tax Credit (EITC), this will hit low-income working families especially hard. According to an analysis by the Center on Budget and Policy Priorities, in 2027, a family with three kids making $40,000 per year will pay $341 more in taxes as a result of the change. Again, this is permanent and as a result, the value of the credit will continue to shrink after 2027.

Because many states use federal cut-offs to determine their own income tax brackets and tax credits, this will also lead to stealthy, unlegislated tax increases at that level. In Minnesota, for example, the state estimates that residents will fork over $400 million in additional state taxes this year, according to The New York Times. The analysis finds that 870,000 families will pay an additional $489 per person this year. And because it killed or capped various tax credits, resulting in more taxable income, the Tax Act will hike taxes in the 41 states with broad-based income taxes. In the near term at least, that will boost state revenues, and in some red states—Georgia, Indiana, and Iowa—Republicans used that windfall to justify their own deep cuts, which are similarly skewed toward high earners. So skewed federal tax cuts cascade into similarly regressive changes in state taxes.

A few states with progressive leaders have taken a different approach. Colorado used its additional revenues to hike funding for schools and infrastructure. And New Jersey Governor Phil Murphy is calling for a new “millionaire’s tax” on high earners that he would use to increase funding for education, transportation, and public pensions. Most states are waiting to see how changes to the federal tax system impact their budgets before taking action.

But the big rip-off of working people hidden in the tax cuts comes in the form of massive and increasing deficits: At least $1.9 trillion over the next decade. Combined with other measures passed by Republicans, including a significant hike in military spending, that number balloons to $2.7 trillion over that same period. And that estimate assumes the economy will continue to grow apace; if that doesn’t prove true, federal deficits will be yet larger.

President Trump’s own 2019 budget suggests what’s in store: According to an analysis by the Committee for a Responsible Federal Budget, it would cut non-defense discretionary spending—which covers a gamut of programs that help working people stay afloat, from Pell Grants to job training programs to the Affordable Care Act’s subsidies—by 40 percent. In addition to decimating the budgets of the Environmental Protection Agency (with a 34 percent cut) and the Department of Labor (21 percent), it includes deep cuts to Medicaid, food stamps, and federal housing assistance. But there’s only so much meat on the bone with discretionary programs, and the real prizes for Republicans are Social Security, which keeps 22 million Americans out of poverty, and Medicare. Less than two months after the GOP’s deficit-funded tax cuts went into effect, House Budget Committee Chair Steve Womack cited skyrocketing deficits to push for a budget resolution that would lead to deep cuts to Medicare and Social Security spending. A month later, five conservative economists warned in The Washington Postof a looming “debt spiral” that “raises the specter of a crisis.”

Rather than blame that on their party’s trillion-dollar giveaway to corporate America, they wrote that “our deficit and debt problems stem from sharply rising entitlement spending,” and that the only way to address it is to “reform and restrain the growth of entitlement programs and adopt further pro-growth tax and regulatory policies.” Three weeks later, Speaker Paul Ryan echoed that view, dismissing the Congressional Budget Office’s analysis and blaming the stormy budgetary outlook on Medicare, Medicaid, and Social Security. At around the same time, House Republicans tried to pass a constitutional amendment that would bar Congress from running deficits altogether.

Politically, cutting Medicare and Social Security is tough. But Republicans have made it clear that, at a minimum, they’ll push for deeper cuts in discretionary spending, including housing, education, and numerous other safety-net programs.

In May, the House Agriculture Committee passed a Farm Bill that would cut spending on nutritional assistance to low-income households by $17 billion over the next ten years. The CBOestimates that this will kick 1.2 million recipients off the program, increasing the cost of food for some of the poorest Americans.

Here again, there will be a downstream effect on state budgets. Federal transfers to the states account for around a third of their budgets, on average, and some poorer states get more than 40 percent of their revenues from the federal government. While most states are enjoying a short-term boost in their own revenues, over the longer term, the Tax Act’s cap on deductibility of state and local taxes will undermine state-funded public services. The National Conference of State Legislatures notes that “more states are experiencing tight budgets than at any point since the Great Recession,” and “a reduction in federal transfers … could present significant long-term challenges for state budgets.”

Some states may follow the path New Jersey’s governor is trying to take with his “millionaire’s tax,” but for most state governments, the political path of least resistance will be cutting services or closing budgetary gaps with regressive sales taxes, “sin taxes,” and fees.

This represents another hidden tax hike because state and local taxes and fees are already significantly more regressive than federal income taxes.

According to an analysis released last year by the Institute on Taxation and Economic Policy, those in the bottom fifth of the income distribution paid just under 7 percent of their income in federal taxes, and just over 12 percent in state and local taxes. That contrasts with the top 1 percent of tax filers, who pay a quarter of their incomes, on average, to the federal government but less than 9 percent of their earnings on state and local taxes. For roughly 70 years, state and local taxes have increased faster than have federal taxes, which has ultimately made our overall tax structure significantly less progressive. Shifting yet more of the total tax burden to state and local governments means taking even more out of the paychecks of working people to finance massive cuts for corporations and the investor class.

As USC legal scholar Edward Kleinbard noted, regardless of the distribution of taxes, “government spending invariably is very progressive: Lower-income Americans get disproportionately more value from government spending, relative to their incomes, than do the affluent, because they rely much more on public schools, social services and health care.”

This underscores the most important hidden cost of the Tax Act: It gives conservatives the ability to apply relentless pressure to cut spending, and that forces typical households to spend more out of pocket on education, health care, retirement security, and a host of other social goods.

In that sense, the Tax Act deepens a longstanding feature of American government: The United States has the fifth-lowest overall tax burden in the Organization for Economic Co-operation and Development (OECD), but we pay dramatically more in out-of-pocket social expenses than the citizens of every other highly developed country. In 2013, the most recent year for which complete data are available, Americans shelled out 11.4 percent of their earnings on private social expenditures, a figure that was about 50 percent higher than the country with the next highest share, the Netherlands, and almost five timesthe average among OECDcountries. This will only worsen under the Tax Act.

Conservatives have tried to sell the American people the idea that tax cuts come without costs. But the hidden costs associated with cutting taxes for the affluent are largely borne by people who can’t afford armies of lobbyists. 

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