The effects of the new tax reform vary greatly on a number of factors. The following is a list of those who will benefit from the legislation, and those who stand to lose big in the coming years.
The new law allows wealthy business owners to deduct up to 25 percent of their business income if they are sole proprietors and owners in partnerships and other noncorporate enterprises. Business owners previously were required to pay the corporate rate on income they earned through their businesses, instead of the individual tax rate.
According to the Tax Policy Center, 19 percent of middle-class taxpayers have pass-through income, as compared to 77 percent of individuals in the top 1 percent income range. TPC also estimated that 85 percent to 88 percent of the benefit from a 25 percent cap on pass-through taxes would go to the top 1 percent.
Multinational corporations stand to gain a double cash windfall as a result of the new law.
The first benefit comes from the fact the new law cuts the tax rate for corporates from 35 percent to 20 percent. The new law also proposes a full exemption on future dividend/income from a company’s foreign subsidiaries.
This could mean a windfall for the major pharmaceutical companies in New Jersey, given that most of them own overseas subsidiaries.
New Brunswick-based Johnson & Johnson, for example, stands to realize large tax benefits, given its multibillion-dollar acquisitions of foreign-based companies Kite Pharma and Gilead Sciences, and its acquisition of Swiss biotech firm Actelion last year.
Currently, if foreign income is repatriated, it is taxed at 35 percent with a full credit of the local taxes in the country in which it based. However, the new law will allow foreign subsidiaries to send the cash back to the parent company after just paying local taxes.
The effect of lowering the tax rate for the middle class could very well be offset for middle-class homeowners or young people looking to purchase their first homes in the state. Under the old tax code, they were able to deduct mortgage payments and property taxes form their federal tax bills.
As a result of the new cap, home values nationwide could drop by up to 10 percent, according to a report by the National Association of Realtors. That decline in value would be heightened in New Jersey, which has some of the highest property tax rates and home values in the country.
According to Stuart Berger, a partner at Clifton-based accounting firm Sax LLC and head of its real estate practice, these deductions would often somewhat soften the angst of prospective and current home owners over the fact that they pay the highest property taxes in the country.
But under the new law, the deduction for property taxes would be capped at $10,000 and the mortgage interest deduction would only apply for existing mortgages and new homeowners who borrowed $500,000 or less to purchase their homes.
“I am concerned that if that real estate tax cap goes higher, it is going to further accelerate the moves out of New Jersey,” Berger told NJBIZ. “It might push some of the seniors who have lived in a community for years to sell their homes and move into a new rental property from that standpoint.”
The middle- and working class
Initially, the new tax reform laws will give tax breaks to low- to middle-income households – ones earning between $19,051 to $320,000 per year – and individuals earning between $38,701 to $160,000 per year, according to the Tax Foundation.
Stan Collender, a former staff member of the U.S. House and Senate budget committees, said those benefits will expire in 2025 so the new law can fall in line with budgetary requirements. While the new law gives significant, permanent tax breaks to large corporations, the lower- and middle classes could actually see a tax increase in seven years.
“You’ve got folks who will get a tax increase, and they all tend to be lower- and lower-middle class folks,” said Collender in a statement. “It’s a very complicated tax bill. When you put everything together and look at its various provisions, the average lower-income person is almost certainly going to see their federal taxes rise.”
Single people who want health insurance
Health insurance premiums for individuals in the nongroup health insurance market would go up, and the number of individuals who have health insurance would go down. That’s because the tax reform law would eliminate the individual mandate set under President Obama’s Affordable Health Care Act.
The individual mandate requires most citizens to have health insurance meeting specified standards, with penalties imposed on those without an exemption who do not comply.
According to the U.S. Congressional Budget Office, eliminating the individual mandate will result in 4 million fewer individuals with health insurance, and an average 10 percent increase in premiums in most years of the next decade.
While Congress did vote to temporarily fund the government through the end of January, GOP lawmakers are not guaranteeing that it will approve funding for the $8 billion Children’s Health Insurance Program (CHIP), which is accepted by most health care practitioners in the state and helps thousands of children get the care they need.
Critics of the GOP plan, such as Bruce Lesley, president of children’s advocacy group First Focus, say that it is hypocritical to give large tax breaks to corporations while claiming the government can’t afford to fund the CHIP program.
“The way Congress is doing this is devoid of any understanding of how programs run,” said Lesley in an interview with the online publication The Intercept. “I used to work in state government. If you’re running a program, and there’s uncertainty, you have to plan to close it down. You have no choice.”
The new tax law nearly doubles the standard deduction from $6,350 to $12,000 for singles next year and $12,700 to $24,000 for married couples, thereby discouraging taxpayers from itemizing their charitable giving. According to The Chronicle of Philanthropy, charities are expecting a $20 billion drop in donations next year as a result of the law.
“If you didn’t itemize the charities that you were going to pay this year, you’re probably not going to get a tax benefit unless you had other expenses that get you past that $24,000,” said Jim Lawrence, CPA and partner at Princeton-based accounting firm Traphagen Financial Group.
The federal deficit
While President Trump and his Republican colleagues have touted that any deficits created by the new tax reform law would be offset by economic growth, the Congressional Budget Office’s Joint Committee on Taxation disagrees.
In a Nov. 26 report, the committee estimates the new law will reduce federal revenue by about $1.6 trillion and decrease outlays by $219 billion over the 2018-2027 period, leading to an increase in the deficit of $1.4 trillion over the next 10 years. Those estimates are unchanged now that the bill has become law.