Unlike a lot of heralded reforms that are adopted by Congress but soon forgotten by the public, the newly enacted Tax Cuts and Jobs Act will have a noticeable and lasting impact on everyday Coloradans. The challenge now is figuring out what that impact will be.
To fully grasp how the measure's many moving parts will affect us - individually and as a state; for better, for worse or both - you'll first have to sift through a lot of over-the-top rhetoric by the act's adversaries as well as its advocates. Then, you'll likely have to wait at least until you file your taxes to figure out exactly how much you'll gain and how much you'll give up toward your own bottom line. And we'll all have to wait even longer, probably a lot longer, before we'll know if this wide-ranging Republican rewrite of the U.S. tax code fosters an overall economic boom as promised.
Absent more concrete specifics, Coloradans so far have heard a lot of dire forewarnings from Democrats and lofty reassurances from the GOP, much of it vague talking points and broad slogans from the respective parties' playbooks. And much of it predictable, of course.
Around the time of the congressional vote on the bill, Colorado's Democratic Party blasted out a press release decrying the measure for giving ". a massive tax break to those at the top while raising taxes on a majority of Americans, causing millions of Americans to lose health care, and exploding the deficit, setting the stage for major cuts to Medicare, Medicaid, Social Security, and other critical programs."
Colorado Republicans countered around the same time with a statement on Facebook by state party Chair Jeff Hays: "Democrats are peddling pessimism, but American workers will experience the truth of this tax reform for themselves when they start receiving larger paychecks next year. Of course, we'd prefer if Democrats worked with us, but since they won't, we'll settle for reminding voters that Democrats banded together in a failed effort to deprive them of extra cash in their pockets."
What are rank-and-file taxpayers to make of it all? Amid the fever-pitch debate, they couldn't be blamed for wondering how lawmakers had managed to fit both feast and famine into one bill. Quite a feat for a do-nothing Congress!
The reality beyond the partisan rhetoric - especially over the long haul, as some of the tax cuts are scaled back in subsequent years - could turn out to be a mixed bag of goodies and zingers.
For starters, here are some of the basics we do know about the tax reform:
- The tax rates on six of the seven current income brackets for the individual income tax have been lowered while the upper end of the income ranges for those brackets have in all but one case been set higher. As a result, probably most Coloradans will pay a lower income tax, and some middle-income earners who were bumped into a lower bracket will pay less than half the rate they paid last year.
- The much-debated federal deduction that individual returns allow for state and local taxes - the "SALT" deduction - has now been capped at $10,000. Meanwhile, that prized subsidy of homeownership, the mortgage-interest deduction, has been limited to mortgages of $750,000 or less.
- The almighty standard deduction has been doubled on single and jointly filed tax returns, to $12,000 and $24,000 respectively. There's an expansion of the child tax credit.
- As noted by the Tax Foundation, the majority of individual income tax changes would be temporary, expiring on December 31, 2025.
- For small-business owners - and in many cases, that means self-employed sole proprietors - the new tax code will give them a 20 percent deduction for so-called "pass-through" earnings (i.e., reported as individual rather than business income) that are invested back into the business.
- A pivotal selling point for the reform's touted potential to fire up the economy is what the measure does for big business - it rolls back the corporate tax rate, from 35 percent to 21 percent.
- Seemingly off-topic but still very much a part of the GOP's tax code rewrite is the repeal of the Affordable Care Act's/Obamacare's beloved (by Democrats), reviled (by Republicans) individual mandate - i.e., the requirement that almost all Americans carry health insurance.
So, what will be the practical effect of some of these changes for Coloradans and Colorado as a whole?
The actual dollar-and-cents bottom line for individual households and businesses is something they'll sort out with their accountants (or tax-prep software of choice). Yet, there are some broader, bigger-picture themes for Colorado that are worth pondering.
Cutting back deductions: The tax bill's critics felt vindicated by the widely reported spectacle last month of homeowners lining up outside local government offices in a number of Colorado counties, as elsewhere across the country, to prepay their property taxes in 2017 before the tax bill took effect. It made great fodder for Democratic Party press releases. It appeared to be a great political told-ya-so, with panicked homeowners fearing the new federal maximum of $10,000 SALT allowance that could be deducted for property taxes and other state and local taxes would stick them with a hefty tab come Tax Day.
Yet, enthusiasts of the tax code contend the early-bird taxpayers in most cases were worried for nothing and could have spared themselves the trouble had they known all the facts. The reform's supporters say for one thing, Colorado is a relatively low-tax state with modest property taxes (though of course there will always be room to quibble over that), so the new $10,000 limit doesn't have nearly the potential to short taxpayers the way it might in some high-property tax states. What's more, the new tax code's advocates maintain the entire issue will be rendered moot in many, if not most, cases by the lower federal income-tax rates for most brackets, coupled with the doubled standard deduction. The net effect will be that many of those who used to itemize their expenses to tap the SALT deduction no longer will do so; one estimate is only 5 percent to 8 percent of filers will now claim SALT and mortgage-interest deductions.
Could SALT limits backfire on Colorado? Colorado Politics columnist Paula Noonan has been among those who fear the cap on SALT deductions could lead to an unanticipated consequence for state and local government. Wrote Noonan in a recent column:
"It's currently difficult for school districts to raise more money above TABOR limits for mills for operational dollars and bonds for capital expenses. The state tried to raise taxes for public education in 2013 with Amendment 66. That initiative bombed at the box office. With property taxes on the rise due to higher home values, along with the loss of the property tax deduction, it's easy to predict that any new education tax request at any level will be an impossible sell."
Even if the SALT cap doesn't wind up affecting very many Colorado taxpayers because they'll no longer itemize, will the theoretical limit nonetheless further discourage voters from embracing a local school district's mill-levy override or perhaps a library district bond issue? Even a believer in the GOP reform like the business community's Jeff Wasden - president of the Colorado Business Roundtable and chair of Colorado for Tax Reform - says it's possible.
"It could have a dampening effect," Wasden says. That could mean even more carefully laying groundwork before pitching tax hikes to the public: "We all have to do a better job articulating how we are going to use the money before we go to voters."
In one pocket and - for some - out the other: State budgeters say even though new limits on the popular federal deductions will be more than offset by lower tax rates and doubling the standard deduction, some Coloradans actually will wind up paying more income tax to the state. That's because Colorado's flat 4.63 percent state income tax is pegged to taxable income on federal returns, and the caps on the federal deductions will increase that base level of taxable income for some taxpayers. While the lower federal tax rates and larger standard deduction will lower Uncle Sam's take from most taxpayers, Colorado's income tax rate remains unchanged and thus will claim more for the state when assessed on higher taxable income.
An anticipated boom for businesses big and small: Whatever the appeal of the federal tax cuts for individual filers, the real thrust of the entire tax-reform package all along has been to significantly lower the corporate tax while giving small businesses a lift, too.
"It's an immediate boon to business," says Wasden. "When you look at oil and gas; you look at breweries, those will experience an immediate impact."
That very selling point for those who say a rising tide lifts all boats is of course a bone of contention for the political left, which scoffs at the reform as a giveaway to big business. And whatever the merits of bolstering business with tax breaks, there are indeed some sweeteners in the package for enterprises of all sizes.
Alongside the cut in the corporate rate, there's also a 100 percent deduction for capital investments over five years and a new tax credit for employer-paid leave for workers.
Speaking of craft beer: And in an especially Colorado-friendly move, the tax bill's authors included a short-term provision called Craft Beverage Modernization and Tax Reform Act. It didn't get much national news coverage, but it could amount to a big boost for Colorado's burgeoning craft-beer industry. The measure, currently timed to end in two years, halves the federal excise tax on beer for small brewers and significantly cuts it for other producers. The idea is to spur breweries to invest the savings in their operations and expand payroll. Left Hand Brewing Co. President Eric Wallace recently told Denverite, ".the new provisions and expected savings already mean four new jobs" for the Longmont-based brewery.
Bye-bye Obamacare - at least, in part: Will the end of the individual health insurance mandate mean a surge in uninsured - especially among Colorado's young "invincibles," who see no need to sign up for coverage? Could that, in turn, contribute to ever-spiraling premiums in the always-precarious market for individual health plans? Will Coloradans - particularly in rural areas with limited access to health coverage (and to health care) - lose their coverage due to spiking premiums? These concerns, too, have been Democratic Party talking points against the GOP's tax code reform. For now, it all remains largely hypothetical; a Congressional Budget Office projection in November foresaw 13 million fewer people covered and 10 percent higher premiums in the individual insurance market due to people declining coverage. That's nationwide; if that projection turns out to be true, it will be interesting to see how much Colorado mirrors Middle America - and what policy makers here might want to do about it.
So, after all is accounted for, will with tax reform be more of a gain or a pain for Colorado?
"We will be net winners," Wasden says, noting estimates that over 80 percent of taxpayers nationwide will see a tax cut. Four percent to 5 percent of upper-income earners will see tax increases, he said.
Yet, don't forget most of the individual tax cuts - unlike the business cuts - will go away after 2025, assuming Congress lets that happen.
And what will it all mean for the economy in general? Will it usher in a new period of prosperity? If so, will the windfall be swept back by the $1 trillion the cuts are estimated to add to the national debt over the next 10 years?
Death and taxes may be among life's few certainties, but for the moment, there's plenty of uncertainty surrounding the Tax Cuts and Jobs Act. We'll all know a little more after April 17.