By Frank X. Mullen
On the surface, doubling the standard deduction may seem like a windfall for the average Nevada taxpayer, but what the government gives with one hand is diminished by what it takes with the other.
For most Silver State residents, the provision in the tax bill passed in December that will have the most impact will be the near doubling of the standard deduction from $12,700 declared by a couple filing jointly this year to a $24,000 standard deduction for the 2018 tax year. Basic math says that couple gets an extra $11,300 tax cut.
But as with most government actions, things aren’t that simple.
“The standard deduction is greatly increased in the law, but in the same breath, (the law) eliminates the personal exemption,” notes Dr. Stephen M. Miller, director of the Center for Business and Economic Research at the University of Nevada, Las Vegas. “So if you are a married couple, with no children, you get that $24,000 deduction under the new tax bill, but if we didn’t have that new tax bill, you would have gotten $13,000 plus twice the 4,150, which is the personal exemption, which is $8,300.”
So crunch the numbers again: that married couple next year would have a net tax break of $3,000 not $11,300.
“It’s not as large as you would have expected at first glance,” he says. “As in life, things are more complicated than they seem.”
Taxpayers with children can expect a bigger break, he says. Although they also will loose the personal exemption for their children, the tax bill doubles the child tax credit. Presumably, that will result in lower taxes for those families, although some analysts have warned the child tax credits for some families may not offset the loss in exemptions. Again, it’s complicated.
According to the non-partisan Tax Policy Center, the “average” U.S. household will get a tax cut of $1,610 for their 2018 taxes, paid in 2019. In Nevada, taxpayers across the income spectrum will get some sort of short-term tax break, according to Meredith Levine, director of economic policy for the Kenny Guinn Center for Policy Priorities.
Just how much tax relief Nevadans will get depends on a myriad of individual circumstances.
The Silver State’s large corporations and small businesses, meanwhile, are all big winners in the new tax environment, with a 14 percent drop in the corporate tax rate and a lower rate on profits earned overseas.
“The question is, what do they do with the money?” Miller asks. “Do they raise the salaries of employees, or do they buy back stock or do they pay dividends or do they invest in new plant equipment? We’ve started to get some evidence on that. Although we’ve seen a lot of ads about salary increases, it’s under 20 percent. More money is going to buy back stock or pay dividends.”
“Pass through businesses,” which include limited liability companies, sole proprietorships and S corporations, will enjoy a 20 percent tax break on the first $350,000 of income. In Nevada, such “pass through” companies account for 53 percent of private sector employment, according to the Tax Foundation. Most of those concerns are small shops and independent contractors, although some much larger companies also fit the category.
The so-called “marriage penalty” also was eliminated for middle-income taxpayers. That penalty refers to the gap between the tax brackets for single filers and married couples filing jointly: a person filing as an individual would pay less in taxes than two people filing as a married couple. Under the new rules, each marginal tax rate for married couples would be exactly double those that apply to single individuals, but only those who make less than $600,000 per year.
Another change affects the 20 percent of Nevada taxpayers who currently deduct state sales taxes on their federal tax return. That deduction will be capped at $10,000.
“That won’t have as big an effect on Nevada as it will in states that have a personal income tax but it will affect some in the state,” Miller says. “I don’t know if it will affect that many people here.”
Under the tax bill, the mortgage write-off on federal taxes will be reduced from $1 million to $750,000 of mortgage principal. “That will affect some people in Nevada of course,” he says, “but I don’t think it will have a huge impact.” He notes the current median home price in Nevada is about $300,000 and that existing mortgages aren’t affected.
Overall, the tax reform package has a mixed effect on Nevada taxpayers in the near term, with most taxpayers getting some relief. But many economists question the wisdom of an economic stimulus at a time when its not clear one was needed and the reduction in taxes without a commensurate cut in programs and services will explode the deficit and the nation’s debt. In the long run it would raise taxes for the middle-class, they say.
Analysts – ranging from the Congressional Budget Office to non-partisan think tanks — have concluded that because the middle class portion of the tax cuts (including the revisions in tax brackets) expire in 2025, while the corporate tax cuts continue unabated, the rich will be the long-term beneficiaries of the latest tax reform measure. The Institute on Taxation and Economic Policy, for example, predicts that in the long term tax benefits will accrue to the state’s highest income households and foreign investors while raising taxes on many low- and middle income Nevadans after the provisions for individuals and families expire.
Those calculations and the part of the bill that eliminated the Obamacare penalties for people who don’t buy health insurance prompted Rep. Jacky Rosen, who is running for a Senate seat in November, to say the new rules “give billionaires and giant corporations a massive tax cut at the expense of hardworking Nevada families.” Killing the Obamacare penalty provision will “spike premiums and cause thousands of Nevadans in my district to no longer have health insurance.” She notes the law also will “explode our deficit by more than $1 trillion, mortgaging our children’s future and triggering deep cuts to services like Medicare.”
Her potential opponent, Sen. Dean Heller, helped draft the GOP bill. He’s focused on the short term advantages of the changes. Heller is touting the news that many Silver State employers are already raising salaries, handing out bonuses, enhancing benefits and hiring new workers in the wake of the bill’s passage. “The tangible, positive implications of this new law for Nevadans could not come at a better time,” Heller says. “… (It’s) put our state and country on the right track to economic prosperity.”