The Week in Public Finance: Trump's Tax Plan, the Tampon Tax and Calling Out the SEC

A roundup of money (and other) news governments can use.
by | April 28, 2017

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Trump Sort of Unveils His Tax Plan

President Trump unveiled his tax reform plan this week, and the massive cuts it proposes have left many wondering how the government would pay for the plan.

Much of the single-page, bullet-pointed statement, which The New York Times called “less a plan than a wish list,” contained promises Trump made on the campaign trail: a much lower corporate tax rate, the elimination of the U.S. tax on foreign profits, a reduction in the number of individual income tax brackets from seven to three, a lower tax rate, and the scrapping of most itemized deductions, including one that lets taxpayers deduct their state and local taxes from their declared federal income.

Treasury Secretary Steven Mnuchin said Wednesday that economic growth, combined with eliminating deductions, would pay for the cuts. Meanwhile, a Tax Foundation analysis of some of these key ideas shows that the plan would ultimately result in more tax revenue for state governments.

The Takeaway: The state and local tax deduction is highly valued because it's a perk that, if lost, would make it harder for states to raise their tax rates going forward. Already, government organizations are sounding alarms about that element in Trump's plan.

But the larger question here is how the federal government will finance these tax cuts. A look at Kansas’ tax reform in 2013 shows that relying on tax cuts to spur economic growth is a dangerous game. In Kansas, total employment, private-sector employment and overall economic growth have all lagged significantly behind the national economy. The state has also repeatedly dealt with budget shortfalls, forcing lawmakers to make unpopular spending cuts.

Taking the Tampon Tax to Task

As more states consider exempting feminine hygiene products from their sales tax rolls, some policy analysts are crying foul.

Last year, 13 states and the District of Columbia considered proposals to exempt feminine hygiene products from the state sales tax. Connecticut, Illinois, New York and the District passed the legislation, bringing the total number of states with an exemption on the books to nine.

The main argument for exempting feminine hygiene products is that they are necessary purchases for most women. States already include several exemptions for such items: Of the 45 states that collect a sales tax, 32 exempt groceries, and all but Illinois exempt prescription drugs. This is mainly done to soften the regressive nature of the sales tax, which means that low-income households tend to hand over a greater share of their income to it than high-income households do.

Some analysts, however, warn that exemptions are bad policy for a tax that is becoming less and less effective each year. The Tax Foundation’s Nicole Kaeding notes that as the economy moves away from goods to services, the sales tax base is shrinking. “As the sales tax base gets smaller,” Kaeding writes, “states must raise tax rates on the remaining items to generate the same amount of revenue."

The Takeaway: Kaeding recommends that states get rid of all exemptions for the sales tax and instead lower the overall tax rate. “This idea of exempting necessities is a political one," she says, "not an economic one.”

She’s right that sales tax exemptions are political. But to be fair, which exemptions aren’t? Moreoever, taxes themselves are unavoidably political. They speak to the policies and values held by each government. For example, four of the top 10 states that the Institute on Taxation and Economic Policy ranks as the most regressive also don't exempt groceries from their sales tax as a way of softening the burden on the poor. In contrast, all of the least regressive states do. 

Pressuring the SEC

State treasurers are turning to Congress to pressure the Securities and Exchange Commission (SEC) not to drop a new CEO-to-worker pay ratio disclosure rule that went into effect this year. In a letter sent this week to senior members of the Senate Banking and House Financial Services Committee, treasurers and state officials from California, Illinois, Pennsylvania and Rhode Island said the disclosure rule will help inform their investments of taxpayer dollars.

“We want companies in our portfolios to be successful, and research indicates that extreme gaps between CEO and worker pay can reduce financial performance by undermining employee morale, which in turn reduces productivity,” the group wrote.

The pressure comes after acting chair Michael Piwowar said in February he was considering delaying implementation of the rule to seek input from companies on any unexpected challenges they are facing in complying. Last month, more than 100 unions, pension funds, activist investors, state treasurers and consumer advocacy groups sent Piwowar a letter urging him to go forward with the rule.

The Takeaway: This debate is more about politics than about the logistics of disclosure. As Reuters noted in March, Piwowar’s announcement was one of several actions he has taken that’s part of a broader push by President Trump's administration to scale back or repeal Obama-era rules they say stifle economic growth. Right-leaning groups like the U.S. Chamber of Commerce oppose the rule. Left-leaning groups like the AFL-CIO favor it. All five state officials that signed this week’s letter are Democrats.

It’s also worth noting the irony here. In recent years, the SEC has been pushing governments toward better financial disclosure practices. Last year, for example, it censured 71 local and state governments for failing to disclose certain financial information about bonds they sold to investors. That the commission would now consider backing away from requiring certain disclosures by corporations seems out of step with its recent actions.

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