One year later, full impact of Tax Cuts and Jobs Act unclear

ELLSWORTH−The Tax Cuts and Jobs Act (TCJA) had a birthday this week. Analysts say it will likely be years before the full impact of the largest tax overhaul in decades is known, but an initial picture of its effects is beginning to emerge.

The first year under the new legislation has been good, said Michael Allen, associate commissioner for tax policy at Maine Revenue Services, although “I don’t think anybody is going to know much until we start to see those tax returns.”

Initial estimates were that the legislation would add “about a billion dollars of tax reductions to Maine households” in 2019, said Allen.

“That’s a pretty good size tax cut. We’re about a $60 billion economy. A billion stimulus to the Maine economy is pretty big.”

While tax returns won’t be filed until April, initial indicators are that the bill did give a bump to the economy in 2018. Sales tax revenue is up, said Allen, as is withholding, indicating that Mainers are making and spending more money.

“They’re going out to restaurants, they’re buying automobiles,” said Allen. While it’s still early, said Allen, the growth “seems to coincide with the implementation of the tax cuts.”

“This is the strongest growth we’ve seen in quite awhile,” Allen added.

Wages were also up in 2018, with personal income for Mainers rising faster than the national average in the second quarter, according to the Bureau of Economic Analysis. But it’s unclear whether this is related to the tax bill or Maine’s minimum wage law, which went into effect in 2017.

Maine’s poorest workers had the largest income gains in over a decade that year, and wages rose faster than elsewhere in New England, according to an analysis of government data by the left-leaning Maine Center for Economic Policy.

The biggest changes individuals and families are likely to notice when they file their 2018 tax returns will be the loss of the personal exemption and expansion of the standard deduction, said Dewey Martin, director of the School of Accounting at Husson.

“There are probably many who don’t understand they don’t get a dependency exemption” for 2018, said Martin. For a household with six children, “That’s a loss of $25,000 in exemptions.”

Although the personal exemption has been eliminated, the standard deduction nearly doubled, said Martin, as has the child tax credit.

But not all households are expected to benefit equally from the law, and those benefits may not last.

In the same Institute for Taxation and Economic Policy (ITEP) report that projected a $1 billion tax reduction windfall for Maine residents, analysts write that most of the bill’s benefits will go “to high-income households and foreign investors while raising taxes on many low-and middle-income Americans.”

An analysis by the Tax Foundation found that households in Maine’s second Congressional District making over $200,000 will see an average tax cut that amounts to 5.1 percent of their income in 2018, compared to 2.3 percent for households making between $50,000 and $75,000.

And because many of the bill’s provisions for individuals and families expire, write ITEP analysts, “In 10 years, lower and middle income families will be facing a tax hike, while higher earners will still be seeing reductions.”

The legislation is also expected to increase the federal deficit over the next decade by $1.6 trillion more than the $10.1 trillion originally projected, according to an April report from the Congressional Budget Office, largely due to lower income tax rates.

Corporations also seem to be benefitting from the changes, said Allen.

“We’ve been seeing very strong corporate income tax revenues really since a year ago,” said Allen. “It’s not quite clear why we’re seeing such strong growth on the corporate income tax line. It could be a combination of the changes and just the strong economy.”

The Tax Cuts and Jobs Act made significant changes to the corporate tax code, including reducing the top corporate income tax rate from 35 to 21 percent. In the wake of this, numerous companies announced bonuses and wage hikes for workers, although reports so far this year show much of the money companies saved went into buying back stocks, increasing profits for shareholders.

“It could be three to five years before we really understand how this has played out, how businesses are reacting to it,” said Allen. Tax professionals are “still wading through some of these changes…they were very complicated and they don’t have full guidance at the federal level,” said Allen.

“It really touched upon every aspect of business taxation.”

Kate Cough

Kate Cough

Digital Media Strategist
Kate is the paper's Digital Media Strategist, responsible for all things social, and the occasional story too! She's a former reporter for the paper and can be reached at: [email protected]
Kate Cough

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