Louisiana recently joined 13 other states that have replaced graduated income tax structures – where the highest rates apply to the highest incomes – with a “flat” tax. Unfortunately, flat tax structures can lead to fiscal instability, budget shortfalls and people with low and moderate incomes paying overall higher tax rates than the wealthy. Carl Davis and Eli Byerly-Duke of the Institute on Taxation and Economic Policy explain the many pitfalls of flat taxes:
Flat taxes leave states ill-equipped to deal with the regressive effects of their other taxes, consigning states to a fate of having to tax high-income families more lightly than low- and middle-income families. So paradoxically, flat income taxes move states further away from the “flat tax” ideal that proponents claim to value, as the overall distribution of taxes tends to be steeply regressive—not flat—in states choosing to levy flat taxes. On top of that, each of the most common claims made in support of flat taxes—that they will promote economic growth, strengthen small business, improve state budgeting, simplify the tax system, or lower taxes for a broad swath of families—are without merit.
ITEP’s Neva Butkus recently explained how Louisiana’s move to a flat tax structure will benefit wealthy residents most:
This tax swap would result in the lowest-income 20% of Louisianans (with incomes under $22,100 a year) receiving a small tax increase due to the state’s additional reliance on deeply regressive sales taxes. Middle-income households making $55,900 on average would receive an average cut of $87. Meanwhile, the wealthiest 1% of Louisiana households with average annual incomes of $1.8 million would receive an average tax cut of nearly $15,400 – more than a full-time minimum wage worker would make in a year in Louisiana.
How will GOP pass – and pay for – new tax cuts?
Congressional Republicans will try to pass President-elect Donald Trump’s legislative priorities in one sweeping bill, rather than separate pieces of legislation. On the campaign trail, Trump promised to focus on border security, increased defense spending and extending and enhancing his multi-trillion-dollar 2017 tax cuts. The Washington Post’s Jacob Bogage and Marianna Sotomayor report:
Last month, GOP leaders had discussed splitting those and other proposals into two bills that could avoid a Democratic filibuster in the Senate by employing procedural steps called budget reconciliation. House Republicans, though, wanted to aim for a single bill, calculating that passage would be easier in one shot with the GOP’s narrow margins in that chamber.
Extending the 2017 tax cuts alone could add as much as $5 trillion to the federal debt over the next decade, while Trump’s entire camping platform could cost as much as $15 trillion. Bogage lays out 10 policies that Republicans could target to help offset those costs, including Medicaid work requirements:
In his first administration, Trump issued waivers allowing 13 states to implement work requirements (only one state ultimately followed through), but Biden rescinded that policy. Reversing Biden’s action would reduce federal spending by another $30 billion, according to the CRFB. Meanwhile, The Post reported in November that Republicans are considering a national Medicaid work requirement. That could save $109 billion, the CBO reported in 2023, but it also could kick tens of thousands of people off health insurance.
Banning medical debt from credit reports
Medical debt will no longer be allowed to appear on credit reports under a new rule from the Consumer Financial Protection Bureau. The move would erase an estimated $49 billion in debt from credit reports and increase the credit scores of about 15 million Americans. But as The New York Times’ Madeleine Ngo explains, the relief from medical debt could be short lived in a looming Trump administration:
… Republicans could soon try to undo the rule. Mr. Trump has promised to slash government regulations and unravel much of the Biden administration’s policy agenda. Republican lawmakers could also try to roll back certain Biden-era regulations using the Congressional Review Act. The rule has already incited controversy. After the bureau proposed the rule in June, a group of House Republicans wrote in a letter to Mr. Chopra that they had “serious concerns” over the attempt to “weaken the accuracy and completeness of consumer credit reports.”
Budgeting without pandemic funds
While the federal government has provided billions of dollars to help state and local governments navigate the challenges of the Covid-19, those funds have expired or are set to wind down soon. Pew’s Liz Farmer recaps a symposium where federal, state and local officials outlined ways to create sustainable budgets without pandemic funds:
The day featured open conversation about the challenges and successes that government officials have experienced with federal funding and how that affects state and local budgeting, fiscal planning, and infrastructure investing. Attendees discussed strategies, policy tools, and responses in three main areas: managing federal funds effectively, building capacity at the state and local level, and future-proofing with innovative financing. The Ravitch Initiative’s recently released report, Resilient State and Local Finance, outlines actions that policymakers can take to advance goals in these areas.
Number of the Day
$1.5 billion – Amount of stolen wages that were recovered for workers between 2021 and 2023 due to federal, state and local efforts. (Source: Economic Policy Institute)