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Midterm elections' prospects complicated by state tax connections to federal tax reform

GOP leaders celebrate six months of tax reform June 2018_Speaker-gov
Rep. Kevin Brady (R-Texas), chairman of the House's tax-writing Ways and Means Committee, and his Republican colleagues in June celebrated the six-month anniversary of their major tax reform bill. Back then, they thought the new tax laws would give them a political edge in the coming November elections. They thought wrong. (Photo courtesy U.S. Speaker of the House)

When the Republican controlled House and Senate passed a major tax reform bill last December, it was supposed to be a twofer.

First, enactment of the Tax Cuts and Jobs Act (TCJA) fulfilled long-standing GOP fiscal and political goals of reducing taxes across the board. Check.

Second, most lawmakers and many political analysts expected the tax cuts would help Republicans retain control of both Congressional chambers in the 2018 midterm elections. No check.

In fact, the TCJA changes — reduced individual income tax rates included — aren't polling well nationally. Only around 42.5 percent support the tax law changes, with another 46.5 percent opposing the measure.

Even in wealthier districts that you'd think would benefit from the new tax law, support and opposition tend to run about the same.

Too many tax tweaks: A big problem comes from some of the so-called simplification that was included in the TCJA.

The new law revised as well as removed many tax provisions, which the GOP said is another benefit of the law. The TCJA streamlining, the lawmakers argued, not only would cut tax rates but also would make filing easier for the majority of taxpayers.

A counter-argument can be made some of the changes were done from a purely fiscal, not tax benevolent, standpoint.

Eliminating things like personal exemptions and miscellaneous itemized deductions and dramatically changing other tax breaks like the $10,000 limit on state and local tax (SALT) federal deductions gave Representatives and Senators maneuverability room when it came to lowering individual and business tax rates.

That bottom-line tax tactic, however, seems to have backfired on the GOP.

SALT tax reform reservations: Generally, the American public is, at best, meh about the new tax laws.

Democrats, though, are honing in on a component that's been controversial since the early stages of the tax bill. Yep, we're talking the SALT provision.

While the focus has been in states that typically lean Democratic in national elections, individual affluent neighborhoods (and Congressional districts) with high property values across the United States also are feeling the squeeze.

TCJA supporters say when the law's other tax benefits, such as lower income tax rates and the end of the Alternative Minimum Tax are factored in, the loss of previous tax breaks like the SALT cap won't matter.

They contend that most taxpayers, when all is said and done, will end up paying lower overall taxes.

Property taxes' political problems: But property taxes tend to be personal. They are connected to people's homes, and that makes them emotional, and angry, about paying the taxes in the first place and then not getting to use that local tax amount as a federal tax deduction.

Plus, folks are getting those real estate tax assessments and bills now. Amidst the midterm politicking.

Most of those potential property tax paying voters won't do the tax math until next year to get an accurate picture of how the TCJA helps or hurts them.

So GOP candidates in many races are sweating out the midterms and trying to figure out, for their particular political situations, how much, or little, to tout the new tax laws.

State tax climate and individual rates: As the new federal tax law has highlighted, the effects of federal legislation are not evenly felt across the full United States.

Part of that is because all states and their localities levy some sort of taxes or fees and all of those myriad collections are affected differently by federal tax rules.

Individual income taxes across the country are a component of the Tax Foundation's annual State Business Tax Climate Index (SBTCI).

In fact, notes Tax Foundation policy analyst Katherine Loughead, states' individual income taxes are the most heavily weighted factor in the Washington, D.C.-based tax think tank's index, accounting for 30.1 percent of a state's overall rank.

The reason, writes Loughead, is because this is the component for which states have the greatest degree of structural variability.

The individual income tax also is important to businesses because states tax sole proprietorships, partnerships and, in most cases, limited liability companies (LLCs) and S corporations. Even traditional C corporations are indirectly impacted by the individual income tax, notes Loughead, since this tax influences the location decisions of individuals, potentially impacting a state's labor supply.

The Tax Foundation map below provides a visual example of where each state falls when it comes to individual income taxes.

Tax Foundtion_Individual Taxes-State Business Tax Climate Index 2018
Click the map to go to the Tax Foundation's interactive version, where you can find out how your state's tax system compares both regionally and nationally.

States that score well from an individual income tax perspective on the Tax Foundation's 2019 SBTCI usually have a flat, low rate with few deductions and exemptions.

They also tend to protect married taxpayers and usually perform better in the annual analysis if their individual income tax includes indexing of brackets, deductions and exemptions for inflation.

A common state plus: States that did well in the latest SBTCI include my native Texas. A key reason for that is because, of course, there's no individual income tax in the Lone Star State.

Other states at the top of the SBTCI list this year are those also without a traditional individual income tax — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Washington (in the Pacific Northwest, not the nation's capital, just to be clear) and Wyoming.

Check out the Tax Foundation's 2019 report to find out whether your state joins those that got high marks, or are part of the group that didn't fare so well.

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