Experts around Cobb say most residents will see a reduction in their taxes under the new tax law passed by Congress this week.
The tax law, expected to be signed into law by President Donald Trump early next year, reduces the tax rates for most of the seven federal tax brackets and nearly doubles the standard deduction, among other provisions.
“The average taxpayer is most likely going to save a little bit of money because their rate is going to be reduced by whatever bracket they fall into, and raising the standard deduction will probably make it easier for the average Joe to more simply file their tax return,” said Kenneth Baer, owner and managing partner of the east Cobb financial planning firm Baer Wealth Management.
Taxpayers have the option of taking a standard deduction or itemizing individual deductions when they file their tax returns. By increasing the standard deduction and limiting other deductions, such as a deduction for state and local taxes, the number of taxpayers who itemize is likely to decrease, Baer said.
The balance between the reduction in tax rates and elimination or capping deductions will likely result in a lower tax bill for most people, but every case is different, explained Roger Tutterow, economics professor at Kennesaw State University and director of its Econometric Center.
“It’s going to depend on what their household looks like,” Tutterow said. “I think most individuals will see their taxes come down, and clearly, it’s not just the tax rates that changed, it’s, for example, there’s a higher child tax credit, there’s a higher standard deduction. Some exemptions or deductions are going away. For example, the ability to take off for paying state and local taxes has been capped now. … So you may make out better in terms of having a lower marginal tax rates, but some of your deductions may be eliminated or capped. So it’ll be interesting to see.”
The amount of the reduction in taxes for middle-income taxpayers is unlikely to be life-changing, Baer said.
“Your average Joe, in my opinion, and this is just my opinion, it’s not going to make much difference in their lives,” Baer said. “They’re going to pay less, which is good, but it’s not a big difference maker.”
The balance between lower rates and limited deductions may not swing in favor of some higher-income individuals, according to Dan DiLuzio, CPA at Henssler Financial, which has an office in Kennesaw.
“I’ve got a lot of clients in the upper brackets,” DiLuzio said. “They may not see as much as they hoped they would see because their itemized deductions are going to be limited, particularly when they’ve had high real estate taxes or high state income taxes, that’s going to go away. And then their tax brackets haven’t really decreased as much as some of the other brackets have.”
Jean Hawkins, managing partner at Hawking, Moore and Cubbedge, a tax planning and business accounting firm in Marietta, went further, saying most of her high-income clients will see higher taxes as a result of the bill.
“Even though the standard deduction has been doubled, the personal exemption is gone and the state and local tax deduction has been capped,” Hawkins said. “I think those things are not going to make up for the fact that the brackets have been lowered slightly. I think that’s not going to net out for most of our clients.”
An analysis by The Tax Policy Center estimates that all income groups will see a reduction in taxes in the short term, however.
“Compared to current law, taxes would fall for all income groups on average in 2018, increasing overall average after-tax income by 2.2 percent,” the analysis reads. “In general, tax cuts as a percentage of after-tax income would be larger for higher-income groups, with the largest cuts as a share of income going to taxpayers in the 95th to 99th percentiles of the income distribution.”
Many of the benefits in the tax bill for individuals will expire by 2027. Republicans in Congress had those provisions sunset in order to pass the bill with only 51 votes in the Senate through a process called reconciliation, Tutterow explained.
“One of the dynamics that’s playing out though is that a lot of the rhetoric is saying, ‘Well, individual income taxes may come down, but there’s a window on how long those lower rates apply. And in the future those rates will go back up.’ And of course, that was done as a way to get the bill through the Senate,” Tutterow said. “By sunsetting the lower individual rates, it allowed them to pass the bill and still come in under the rules of reconciliation.”
Tutterow said the decision to put an end date on the individual portions of the tax bill while making the corporate tax benefits permanent was a calculated move by Congressional Republicans.
“I think there’s a calculated bet being made that Congress will extend lower tax rates for individuals in the future,” he said. “I think the sense was if they’re going to cut the corporate rate, now’s the time to do it permanently because they have the votes. Several years down the road, Republicans may not be in the majority, and then a lower corporate rate might not survive if it were sunset. So I think that’s why the corporate rate was made permanent, while the individual tax rates remained with a sunset provision.”
The largest cuts in the tax bill are for corporations, and Congressional Republicans are betting that putting more money in the pockets of business owners will lead to higher wages, more jobs and increased investment. Whether or not that will happen remains to be seen, Tutterow said.
“One thing we have to remember: it’s easy to say the business owner is better off,” Tutterow said. “We need to remember that for large businesses, we’re talking about stockholders. We’re talking about people who own stock in the company. They’re the beneficiaries. Now, whether the additional after tax income will be used to hire more people or be used to invest in capital equipment to grow the enterprise or whether it will be returned to shareholders is somewhat an open question. Therein lies the real question mark about how stimulative the plan is for employment and investment.”
Wage growth depends on several factors, including the availability of labor and productivity, he said.
“It may be unpopular to say this, but businesses hire people and businesses give people raises because they need to,” Tutterow said. “The reason we see wages rising is it’s necessary to attract and retain the workers you need. So I think that’s an important consideration. I don’t think that just because businesses find themselves with additional after-tax profit, they necessarily go hire more individuals. They’re going to find themselves with more after-tax profit and they’re going to decide to move into new markets or launch new products to grow the enterprise, and that’s why they hire new people.”
Baer agreed, saying business owners will do well under the new tax regulations, and more money in their pockets could lead to hiring more people, new technology being developed and higher wages.
“I think that’s the idea behind it. Whether that turns into reality or not, we don’t really know. … The overall theme is if you’re a business owner, you have the potential to seriously negate your tax liability. It depends on the kind of business, it depends on how you receive your income, but there is a lot of potential there to lower your taxable income or what you’re paying in taxes as a wealthy — a business owner who’s doing very well.”
Manufacturing is one industry that could see growth as a result of the tax changes, Tutterow said.
“That is one of the sectors that there’s some hope that the lower tax rates will improve profitability for domestic production. We have seen an outward migration of production moving to Mexico, Central America and to Asia. And there’s a lot of trends now that are allowing us to be more competitive at bringing production home. And certainly lower tax rates on profits could contribute to that,” Tutterow said.