La. families could get $1,000 tax cut under GOP bill, while the state’s cities will suffer

13th November 2017   ·   0 Comments

By Christopher Tidmore
Contributing Writer

As one of the poorer states in the nation, the average Louisianian stands to gain under the proposed House GOP tax reform’s middle-class tax cuts, and even more under the Senate plan, yet both Bills end the federal deduction for historic preservation—endangering the neighborhood renaissance in New Orleans.

An analysis by the Congressional Joint Committee on Taxation finds that in 2019, the year that U.S. House’s proposed “Tax Cuts and Jobs Act” would fully take effect, 58.2 percent of households nationwide would receive a meaningful tax cut, while 8.3 percent would face a hike. In other words, doubling the standard deduction, increasing the Child Tax Credit to $1,600, and creating a new 12 percent tax bracket (up to $90,000) would give an average $1,182 tax cut for a family of four making $59,000.

The vast majority of the aforementioned 8.3 percent live in high-income and property tax states, where the average mean income is also above $70,000. The House GOP tax reform plan caps the State and Local Tax (SALT) deduction at $10,000 and limits the deduction to only property taxes. In the Pelican State, the average income is $45,727, and thanks to the homestead exemption, only a small number of homeowners pay more than $10,000 in property taxes. Moreover, the $500,000 reduction in the mortgage interest deduction, a key element of the House bill (reducing by half the current $1 million threshold), likely harms wealthier states where housing property values are far higher than Louisiana. Only a very select group in the Pelican State own homes worth more than a $500,000.

The Joint Committee does suggest that the middle class could see a tax hike after 2027 which could impact Louisianians making $40,000 to $50,000 — if a $300 tax credit for families enacted by the bill expires in 2023, as it is scheduled to under the text of the legislation. This provision has fueled Democratic criticisms that the GOP bill will ultimately raise taxes on the middle class, or at least 11.6 percent of them, in six years.

However, the expiration date is an accounting gimmick, designed to keep the entire tax cut package under $1.5 trillion in cuts over 10 years, the maximum allowed under budget resolution last at the end of October. “It will never go away,” House Ways and Means Chairman Kevin Brady, the bill’s lead author, recently said. Bipartisan pressure to not raise taxes on the middle class will cause future Congresses to renew the credit, he reasons.

One of the ironies of the legislation, for a GOP Bill at least, is that the top rate of taxation does not fall. In fact, the House Republicans, shockingly enough, seek to raise taxes on the rich. The current maximum rate of 39.6 percent will remain in place for married couples making more than $1 million per year, but they will also be subject to a surcharge.

In an effort to fill a gap of $50 billion, to keep the total tax cut under $1.5 trillion over 10 years, the legislation “claws back” the tax cut the super rich received from the 12 percent and 25 percent “middle-class” brackets. This extra charge enacts an effective tax rate of 45 percent for those making from $1 to $1.4 million. The surcharge amounts to $100 for every $10,000 in revenue between those amounts.

Call it the Triumph of the new Trump populists over the old Wall Street-GOP establishment. Nevertheless, very few Louisianians would be subject to the so-called high-income “Bubble Tax” simply because there are little more than a handful of people in the state who earn between $1 and $1.4 million. For the “Tom Bensons” of La.’s super-rich club, the effective rate falls proportionately back closer to 40 percent for incomes in excess of $2 million, as the surcharge phases out once the lower rate tax cut is paid back.

House GOP leaders, especially Majority Whip Steve Scalise of Jefferson, argue that the new “territorial” corporate tax rate of 20 percent will incentivize companies to repatriate profits and headquarters to the U.S., a direct benefit to a port city like New Orleans. (The first corporate inversion that began the trend of relocating corporate HQs offshore was the New Orleans-based McDermott International in 1983.) Scalise also contended that the new “pass through” LLC rate of 25 percent will financially empower small firms to create jobs. In both cases, Democrats counter that the lower rates will have minimal impact on the economy.

Yet, the real animus of the opposition party has focused around the termination of the Estate Tax by 2024. Democrats call phase out a “handout to the super rich,” not worth the deficits it would create. Whether the “death tax” ends in six years or not, though, in 2019, the inheritance threshold not subject to taxation will double from $5.49 million to $11 million per individual inheritance, double for married couples. This expanded exemption does have some Democratic support from Senators representing agricultural producing states, and would likely remain, even if the 40 percent tax on estates above that figure is reinstituted in a decade.

More specifically, that $11 million exemption per person ($22 million for couples who properly structure) would take most Louisiana small businesses with high inventory stores off the estate tax list, companies who are subject to the tax regardless of their profitability—and, as noted, would especially aid the agricultural sector. Family farms remain a key part of the Pelican State’s economy, and more than a few sugar farmers in the South and cotton producers in the North are land rich and cash poor. The $11 million — $22 million exemption would cover the value of most local landed agricultural properties.

In order to pay for these cuts, and keep them below the $1.5 trillion tax cut total required under their budget resolution, the House Republicans opted to do away with several popular deductions to make “ends meet,” None of the changes, however, quite impacts the Louisiana economy more than the loss of the Historic Restoration Tax Credit. This deduction of 20 percent of the cost of rehabilitating an historic property has fuelled the restoration of New Orleans’ historic neighborhoods and Central Business District. And, it has done the same for small-town main streets across the state.

As Erin Holmes of the influential Crescent City-based Preservation Resource Center observed, “Louisiana is the national leader in historic preservation. In 2016, Louisiana was number one in the nation in the number of Historic Tax Credit projects underway. Since 2002, HTC projects have totaled over $2.3 billion in development costs and created over 39,000 jobs. If you live outside of Louisiana, these credits also have a huge impact on your state as well. We have already seen tremendous success, but we must retain the HTC to continue revitalizing our towns and urban centers.”

“The HTC is the most significant investment the federal government makes to preserve our nation’s underutilized, historic properties and is a vital economic development tool for the revitalization of blighted areas across the nation,” Holmes continued. “Since 1981, the credit has leveraged more than $131 billion in private investment, created more than 2.4 million jobs, and rehabilitated more than 42,000 historic buildings for new and productive uses. Research by the National Trust for Historic Preservation has shown that the credit generates over $1.20 to $1.25 in new tax revenue for every $1.00 of tax credit utilized, meaning not only does it pay for itself, it also creates revenue for the federal government.”

She added, emphasizing the PRC opposition to the HTC phase out, “It is critically important that members of the Louisiana congressional delegation understand the very positive impact the federal HTC has made in communities across our state, and that its elimination would be a tremendous loss for economic development and cultural preservation efforts throughout Louisiana.”

The most recent beneficiary of the tax credit was the restoration of the Former Boarding House and Dining Hall of Straight University at 1423 N. Claiborne Ave. The Historic Home under the interstate housed the first Black University in the city and was the direct forerunner of Dillard. According to the PRC, the tax credit made its preservation possible. As it did other locations of African-American pride such as the Pythian Temple on Loyola Ave. and countless other historic properties.

Pres Kabacoff, founder of HRI Properties, whose firm has overseen projects from RiverGarden to the Hibernia Tower, maintained that the HTC drove revitalization of entire neighborhoods. The rehab of one historic building led investors to see potential in another building on the block. “And then another,” Kabacoff said. And, not just New Orleans would be affected. As Nola.com noted, Carling Dinkler, vice president of business development at Enhanced Capital Partners, explained that 40 percent of historic tax credit projects over the last 15 years have been in communities with fewer than 25,000 people, including dozens of small Louisiana towns.

Late Thursday, Senate Republicans revealed their version of tax reform, differing in several areas from the House. The Senate plan would retain the current seven rate structure, though at lower rates and at higher thresholds of income, rather collapsing the system into just the four rates proposed in the House version (10, 12, 22.5, 25, 32.5, 35 and 38.5 percentages versus 12, 25, 35 and 39.6). The top rate would still kick in at $500,000 for individuals, $1 million for married couples, but the Child Tax Credit would increase to $1,650 per child, and the bottom rate of taxation would be 10 percent rather than the House’s 12 percent, both benefiting poorer Louisiana taxpayers. One estimate suggests that a family of four making less than $73,000 could see its tax bill fall by $1,500 under the Senate plan.

The Upper Chamber’s proposal would fully repeal of the SALT deduction, yet leave the $1 million mortgage deduction alone (dismissing the House GOP cap at $500,000) as well as retain deductions for catastrophic medical costs which was jettisoned under the House plan. It also cuts the corporate tax rate to 20 percent, but its implementation is delayed by one year.

The Senate did reject the House’s 25 percent tax rate for LLC “pass-throughs” in favor of a 17.5 percent tax credit on individual taxes for the self-employed—which would provide an even lower effective tax rate for Louisiana’s middle-income, small-business people. The Senate would retain the 40 percent Estate Tax, though the exemption would increase to $11 million per person and $22 million for surviving spouses who properly structure.

Nevertheless, the Senate plan would completely eliminate the Historic Tax Credit just as the House proposal.

With both versions killing the HTC after this year, the chances of retaining the popular program remain slim. Still, public pressure can make a difference. The original version of the House GOP bill would have ended the popular $13,574 adoption tax credit. Surrendering to a bipartisan tide of phone calls and letters, that program was restored last Thursday afternoon in the House Ways and Means Committee—and the Senate tax reform legislation did even propose its removal.

This article originally published in the November 13, 2017 print edition of The Louisiana Weekly newspaper.