Americans Can Be Thankful for Tax Cuts
Since Congress passed the Tax Cuts and Jobs Act of 2017 (TCJA), Americans are getting a larger piece of the pie from federal tax cuts and ensuing state tax reforms in many states. In 2018, GDP has grown by an annual average of 3 percent for the first time since 2005. With TCJA driving the economy and tax policy debates prevalent in state capitols, taxpayers have much to be thankful for in 2018.
Unemployment among all demographics is the lowest since 1969, and 1.8 million people who were unemployed in 2016 now have jobs. African American unemployment is the lowest in recorded history at 6 percent. The unemployment rate for Hispanic and Latino Americans also set a record low at 4.5 percent. The unemployment gap between men and women that emerged during the Great Recession no longer exists, further indicating a healthy job market.
Wage growth is another perspective through which to view the economy. In September, median real weekly earnings hit a 40-year high, continuing an upward trajectory starting the quarter immediately following federal tax reform. The other side of wage growth is growth in consumer spending. Last quarter, consumption and private investment grew by the largest margin since early 2015. Low unemployment, higher weekly earnings, and accelerating consumption and investment indicate that Americans have more take-home income as a result of federal tax reform and the booming economy.
Tax reform didn’t stop once Congress passed the TCJA. Starting January 2018, the 50 “laboratories of democracy” suddenly had a perfect moment for state-level tax reform. Many states practice income tax conformity, meaning they match some or all of their state income tax bases to federal provisions. When the federal income tax code changes, as it did with TCJA, many states must decide how they will conform their codes.
Two key aspects of federal reform —eliminating the personal exemption and reducing the ability of taxpayers to deduct certain items, among others — broadened the federal tax base. A broader federal tax base leads to significant tax revenue increases for states. Congress cut tax rates as a part of tax reform to avoid tax increases resulting from a broader base. Unless states reduce their own tax burdens, taxpayers may see tax increases on their state returns.
Many states eagerly picked up the tax reform baton handed off by Congress. Idaho doubled the standard deduction, reduced corporate and personal income taxes, and expanded the child tax credit to encompass more families. In all, Idaho saved taxpayers $104.5 million for FY 2019. Nebraska tied income tax brackets to inflation, preserved and expanded the personal exemption, and increased the standard deduction saving taxpayers $326 million in 2019. Iowa reduced personal and corporate income tax rates, eliminated the alternative minimum tax, and laid the groundwork for future tax cuts projected to save Iowans $2.1 billion over the next six years. Missouri took the opportunity to reduce the corporate income tax rate from 6.25% to 4% in 2019, saving taxpayers $49.7 million next year and nearly $100 million the year after. Georgia cut their corporate income tax rate from 6% to 5.5% by 2020 as well as doubling the state standard deduction. Assuming the corporate income tax rate falls to 5.5% upon legislative and executive approval, Georgia’s 2018 tax cuts will save taxpayers $5.7 billion over five years.
While the effects of federal tax reform are illustrated through national statistics on GDP growth and unemployment, ALEC’s annual Rich States, Poor States and State Tax Cut Roundup publications pick up where national data leaves off and analyzes the effects of good tax policy on state economies. Florida has cut taxes seven years in a row and returned over $1 billion to taxpayers. In turn, Florida’s GDP has grown by 24 percent, and 845,239 Americans moved to the Sunshine State since 2007 to take advantage of a competitive economy. Arizona cut taxes six times in a row, growing its GDP by 23 percent and attracting 372,320 new residents since 2007. Idaho, Nebraska, Iowa, and others will see economic outlook improve and their taxpayers will now reap the benefits of both federal and state tax reform.
Following a strong year of tax reform, consumer confidence in the economy is at an 18-year high. Economic growth has led to higher take-home pay, and tax reform means earners keep more of their wages. Thanksgiving is a time to be thankful for our friends, family, and well-being. As we gather around the table and share a bounty, this year we can give thanks for the first comprehensive tax reform in 31 long years and a strong economy that is already enhancing the well-being of hardworking American taxpayers.