The average Wabash Valley family would see little benefit from federal tax cuts being promoted by President Trump and Republican Congressional leaders, according to local economists.
One expert says expected increases in local taxes stand to more than wipe out any savings.
“The relatively small effects on middle-income earners probably means that the overall effect on the average Vigo County household will be small,” said Kevin Christ, associate professor of economics at Rose-Hulman Institute of Technology.
Median household income in Vigo County is well below the national average, Christ noted. Local issues such as a new jail, new or renovated schools and increased funding for public safety will be much more important locally, he said.
“Those issues will likely make any small effect of this tax reform on the average Hautean’s federal tax bill a distant memory by 2019,” he said. “What probably won’t be a distant memory by that time is a rising federal deficit because of lower tax revenues.”
Vigo County’s estimated median household income was $43,910 for 2016, according to the U.S. Census Bureau’s American Community Survey.
The statewide median income was $52,513 while the national median was $57,617.
While some tax cut appears likely, the Trump plan “will do little or nothing to address the underlying problem, inequality. In fact, it will make it worse,” said Don Richards, economics professor at Indiana State University.
A framework for tax reform Trump and GOP leaders outlined “offers a once-in-a-generation opportunity to give American workers and businesses the level playing field they deserve,” said Gary Cohn, director of the National Economic Council.
A corporate income tax cut and eliminating the estate tax would mostly benefit the rich, while a “passthrough” provision would not only lower taxes for small businesses but also for high-earners such as Trump himself, said Richards.
“The main benefit to middle- class families is the doubling of the standard deduction since most of such filers do not itemize deductions,” he said. “Indiana households that do itemize would be hurt by the elimination of the deductibility of state and local taxes.”
But many important features of the reform plan are still up in the air, making it hard to assess the ultimate impact, Richards added. Some estimates show taxes for some upper middle- class families will increase, he said.Richards and Christ share the view of many economists that the “supply side/tax cuts pay for themselves” argument is a myth.
“Perhaps it had some validity back in 1981 when the top marginal rate was 70 percent, but it’s foolish to believe it today when the top marginal rate is only 35 percent,” Christ said.
It is “inconceivable,” he said, that people would work more to make up for lost revenue from lower rates.
Richards noted an analysis by the non-partisan Tax Policy Center shows that benefits for middle-income earners seem to go away after 2018, when mid-term elections will take place.
Comparison with state tax cuts President Trump has cited cuts Vice President Mike Pence signed into law as Indiana governor as a national model.
During his first year as governor, Pence called for a 10 percent cut in personal state income taxes. However, even with Republicans holding two-thirds of the seats in the General Assembly, he had to settle for a 5 percentcut. While there are similarities between current federal framework and Pence’s state cuts, Pence faced resistance from his own party “who knew that they couldn’t hide from the consequences of these cuts. They had to fund the state,” said Richards.
During Pence’s term as governor, Indiana also eliminated its inheritance tax, reduced corporate income taxes and its financial institution tax. The total impact of the cuts has been estimated at nearly $700 million annually. But, earlier this year, Pence’s GOP successor, Gov. Eric Holcomb, secured passage of higher motor vehicle taxes and vehicle registration fees expected to raise $1.2 billion a year by 2025 to fund road work.
“Pence’s tax cuts were great for Pence,” Richards said. “He got to walk away with a reputation of a tax cutter while leaving the state to figure out a way to compensate for the loss of revenue needed to fund health care, build roads and keep schools operating.”
While Indiana is proud of its 3.5 percent unemployment rate, there’s more to a healthy economy, according to Richards.
“If we look at wage growth and labor force growth, for example, Indiana doesn’t come off as a model for the nation,” he said.