I have written on a number of occasions (here, here, and here) about how important it was that Congress extend at least the dividend tax cuts enacted during President Bush's first term (and most famously referred to as the "Bush tax cuts"). So I was thrilled earlier this month when Congress passed the tax cut extension (while the dividend tax didn't make big headlines, it was part of the package).
To recap, these are the most important features of the tax bill (which the Wall Street Journal called "the most far-reaching tax bill in a decade"):
- All of the "Bush-era" tax rates and breaks will be extended for all income earners for two years (see a list of those rates and breaks here) - including the low-income child tax credit, the earned-income-tax credit, the higher-education-tax credit, and the 15 percent cap on the dividend income tax.
- A provision to "reform" the alternative minimum tax to prevent an additional 21 million taxpayers from getting hit by it.
- For one year, the Social Security payroll tax will decline from 6.2% to 4.2% on income up to $106,800. Economists predict this cut alone will give the economy a nice boost.
- For two years, the estate tax rate will be 35% on estates of more than $5 million.
- Benefits for long-term unemployed are extended for 13 months.
- Businesses will get a tax write-off for new equipment purchases.
- Businesses also got a big research credit, a range of subsidies for alternative energy and a number of targeted breaks.
The total 10-year tab amounts to $858 billion - $801 billion in tax cuts and $57 billion in unemployment insurance extensions. Opponents, of course, argue that the tax package will overburden an already strained fiscal system (they would have raised taxes on the wealthiest Americans). Proponents, on the other hand, argue that the last thing the economy needs right now is a stifling tax increase.
What about in Arizona? Earlier this month the Arizona Republic ran a story highlighting the likely effects of the tax cuts on Arizona's economy. The bottom line:
- The tax cuts "could provide the one thing the economy has been lacking this year: confidence," according to Dennis Hoffman, an economist at ASU.
- The reduction in Social Security payroll taxes alone would add an estimated $2.3 billion a year to Arizona workers' paychecks, according to Marshall Vest, an economist at the University of Arizona. That's an average of $1,000 per worker. Best of all, it puts "money into circulation immediately."
- The provision that will allow businesses to deduct the full cost of new equipment purchases in 2011 (instead of following a typical depreciation schedule) "would stimulate the Arizona economy incredibly as businesses buy new equipment and upgrade facilities," according to Michael Pollack, a shopping-center owner and operator.
- The extension of unemployment insurance for the long-term unemployed means that 86,474 Arizonans whose payments were to be phased out will keep their benefits. (That's critical, as every dollar of unemployment benefits has a $2 impact on the economy, according to the U.S. Labor Department.)
- The tax could add, overall, 1.5 percent to 2 percent to the national economy's growth rate in 2011, according to Vest.
Clearly, the tax cut package will have immediate beneficial effects on Arizona's economy. But over the longer term, tax reform - at both the federal and state levels - is critical. While the extension (and expansion) of the Bush-era tax cuts is by-and-large a good deal for individuals and businesses, it doesn't infuse any more certainty into the tax code, and businesses need certainty to be able to plan ahead. As it stands, there are nearly 150 tax provisions that are set to expire in just a year or two. (And that's not even considering the challenges posed by a tax code that is 70,000 pages long.)
Some Congressional members have suggested that they will take up tax reform next year, but most observers doubt those suggestions will go anywhere. Columnist Ezra Klein of the Washington Post writes, "I don't take idle talk about ‘lowering rates and broadening the base' too seriously. When I hear politicians start to lay out answers to some of these questions, I'll become optimistic about tax reform. But so long as I hear them pushing other agendas under the cover of tax reform, I'll hold my enthusiasm." I wouldn't say I'm optimistic about the chances for tax reform, but that doesn't mean I'll stop petitioning for it.
