New tax law means fighting over unfunded state pension plans is about to get worse

The recently enacted U.S. tax law restricts federal deductions for state and local taxes (SALT) to $10,000 — including local property and sales taxes as well as local income taxes. While this new restriction will have many implications, it will have a particularly draconian impact on states with large unfunded liabilities for pension benefits and retiree health care, in particular the residents of Illinois, Kentucky, Connecticut, and New Jersey.

Unless states can implement effective ways to circumvent the SALT restriction, they will face much higher political barriers to meeting their unfunded benefit obligations through increased tax revenues. Instead, states will be forced to severely cut spending on public services and/or adopt major reforms of their benefit plans.

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[Trump tax bills would push US jobs and factories abroad]

The tax legislation now before Congress would fundamentally change the way that foreign profits of US multinationals are taxed, from a worldwide to a territorial approach. But the design of the new approach would encourage the offshoring of US jobs and factories.

Under the current worldwide approach, all profits earned by foreign subsidiaries of US companies are subject to tax by the US at a 35 per cent rate, but only if and when they are repatriated to the country. By contrast, the Republicans are proposing to adopt a territorial system, under which the US would generally not tax profits of US companies earned in any foreign country. These profits would still be taxed by that foreign country at whatever rate it chooses.

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[House Republicans Can Improve the Bipartisan Health Bill]

The Senate has a good chance of passing a sensible bill, put forward by Sens. Lamar Alexander (R., Tenn.) and Patty Murray (D., Wash.), to stabilize American health-insurance. But to get the bill through the House, Democrats will need to accept reasonable suggestions from Republicans.

In response to Republican requests, the Alexander-Murray bill requires faster review of state requests for waivers from Obama Care’s insurance mandates, as well as more-flexible standards for approving these requests. Such state waivers would still be barred from eliminating ObamaCare’s protections for pre-existing conditions.

Republicans also won a major expansion of health-care plans with very high deductibles, geared mainly for catastrophic insurance. ObamaCare allows such catastrophic policies to be bought only by adults under 30 or with a hardship exemption. Under the new bill, all Americans could buy low-cost, catastrophic insurance.

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A solution for Congress to keep business and jobs in America

The Trump administration and Republican congressional leadership recently released their unified framework for tax reform, which includes a proposed territorial system for taxing foreign profits of U.S. multinational corporations. Yet, the proposal does not define what it declares are necessary protections against “stopping corporations from shipping jobs and capital overseas.”

Under our current system, the United States taxes foreign profits of U.S. companies at 35 percent, if and when these profits are repatriated to the United States. Because of this deferred taxation, U.S. companies now hold more than $2.5 trillion in foreign profits abroad. These holdings are a drag on potential U.S. economic growth, because U.S. companies may not use their deferred foreign profits to build facilities or make  acquisitions within our borders.

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House GOP plan will boost tax revenue and satisfy businesses

Searching for revenue raisers to offset tax cuts, House Ways and Means Committee Chairman Kevin Brady (R-Texas) has recently suggested a limit on tax deductions by businesses of the interest they pay on bonds and loans. Such a limit, if set at 50 percent of a firm’s net interest, is a sound proposal from both policy and budget perspectives.

As a policy matter, such a limit on interest deductions would mitigate the severe bias of the tax code in favor of debt and against equity. Currently, a company may deduct 100 percent of the interest it pays on debt, but none of the dividends it pays on its stock. Consequently, when a company finance projects externally, it typically issues bonds or borrows from banks. In fact, projects financed by debt have a 44 percent lower effective tax rate than those financed by equity, according to the Congressional Budget Office.

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Solving The Problem Of Bipartisan Health Care Reform

After the Senate Republicans repeatedly failed to obtain a majority for any health care bill, a bipartisan effort at health care reform has emerged in the House. The effort is led by the so-called Problem Solvers, a group of 43 Representatives, divided roughly equally between Democrats and Republicans.

The legislative goals of this bipartisan group are short-term and sensible: to stabilize the state insurance exchanges, reduce the burdens on small employers, and mitigate the impact of higher premiums on individuals. While avoiding the over-heated politics of revamping Medicaid, the group wants to accomplish its goals without adding to the projected federal deficit.

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Trump’s tax plan is one big step from reality

While President Donald Trump’s latest tax plan moves in the right direction, the math still does not work.

Earlier this week in a MarketWatch commentary, I argued that Congress would likely be obliged to lower the corporate tax rate, and the related rate on partnership business income, to 25% rather than 15%. On Wednesday, Trump announced a tax framework with a 20% rate for corporations and a 25% rate for partnership business income.

So the president is halfway to reality. The Trump tax plan still costs $500 billion more than the $1.5 trillion deficit limit in the Senate budget resolution, which is needed to pass tax bills by 51 Senators instead of the usual 60. That problem can be simply solved by cutting the corporate tax rate to 25% from 35% — which will still be a boon to corporate America.

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Why the Trump tax plan’s fuzzy math doesn’t add up

Below is an article demonstrating that the proposed 15% rate for corporate taxes is clearly at odds with the recent budget resolution, allowing tax cuts to generate a budget deficit of $1.5 trillion over the next 10 years. A more realistic corporate tax rate would be 25%.

Cutting the corporate tax rate to 15%,  and applying that 15% rate to business income from most partnerships, would cost $3.7 trillion over the next 10 years.  These revenue losses cannot realistically be made up by revenue gains from repealing existing tax preferences, which are fiercely defended by special interests.

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