On April 25, 2018, Arizona’s Republican Gov. Doug Ducey signed a bill passed by the state’s Republican controlled legislature to exempt coal purchases from the state sales tax. It would lower the price of coal produced at the state’s only active coal mine, Peabody Energy’s Kayenta Mine on Black Mesa. The objective of the bill is to help attract a buyer for the mine’s only customer, the coal-fired Navajo Generating Station power plant near Page. The bill was pushed by Peabody Energy’s lobbyist Tom Dorn.
All but one of the Navajo Generating Station’s owners have decided to shut it down in 2019 because they can buy cheaper and cleaner electricity on the open market. And its other owner, the U.S. Bureau of Reclamation, cannot afford to operate the plant by itself, so if it shuts down, so will the Peabody coal mine.
“This bill is essential to the economic success of the Navajo Nation, the Hopi Tribe, and surrounding communities,” Ducey said when he signed it. The two tribes would, indeed, be severely impacted by a shutdown because the power plant and mine are located on their reservations. Both tribes hold leases for the mine, and the Navajos hold one for the power plant. If the plant and mine close, it’s estimated the annual revenue of the Navajo Nation’s government would shrink by about $40 million, or about 23%, while the smaller Hopi Tribe’s revenue could decline by about $12 million, or about 67%. In addition, the power plant and mine employee about 750 workers, nearly all of them Native Americans. (Some people would still be needed to maintain and dismantle the plant and mine if they were closed.)
Most economists say the best way to reduce the budget deficit without hurting the economy is by gradually implementing a combination of carefully crafted spending cuts and tax increases. But Trump’s Director of the Office of Management and Budget (OMB), former Congressman Mick Mulvaney, says there’s no political will in Congress to make spending cuts, so the only way to reduce the deficit is to increase tax revenue by stimulating annual economic growth to at least 3% through tax cuts.
A reduction in corporate taxes is at the core of the Republican tax reform strategy. They claim that the U.S. economy is at an international competitive disadvantage because the 35% federal corporate tax rate that’s been in effect since 1933 is among the highest in the world. They say that lowering it would increase economic growth because corporations would repatriate some earnings from foreign countries and conduct more business in the U.S.
But there is little evidence that the proposed tax cuts will generate enough compensatory growth to pay for themselves. For example, if 25% of U.S. income goes to towards taxes, every $1 of tax cuts would have to generate more than $5 of increased economic activity. And history shows that previous Republican tax cuts failed to produce promised increases in tax revenue. During the Reagan administration in the 1980s the Republicans gave tax cuts to the wealthy that were supposed to generate growth and income that would “trickle down” to the middle and lower classes. Instead, their supply-side strategy significantly increased the national debt, shrank the middle class, increased unemployment, and accelerated income inequality. In other words, the wealthy people just kept most of the money.
Furthermore, while the statutory U.S. corporate tax rate is high, corporations can take expense deductions that make their effective tax rates lower. According to a 2017 Congressional Budget Office report, the U.S. effective corporate tax rate was only 18.6% in 2012. Also, corporations consider many factors when they make business decisions. A tax rate would be the deciding factor only if all other things were equal. And few corporations are willing to pass up the profitable privilege of doing business in the U.S., the world’s largest economy.
Some corporations, of course, would use the money they’d save from a reduction in corporate tax rates to invest in new production. But many would simply inflate their stock values by buying back stock, increasing dividend payments to their stockholders, or they would pay their executive officers to even more outrageous amounts. These things would contribute little to economic growth, as most stock dividends don’t go to middle or lower income class consumers, and wealthier CEOs would just accelerate growing income inequality.
The primary lesson from the failure of supply-side economics is that not all tax cuts are the same, and that real economic stimulus comes from reducing taxes for the U.S. economy’s primary consumers – the lower and middle income classes. Subsequently, supporters of the Republican tax reform effort, including President Trump, are selling it as a tax cut for the middle class. But the middle class tax cuts included among the various features in their reform proposals are very modest, and in the Senate’s version of the bill they would expire at the end of 2025.
The reason they are set expire is because Senate Republicans passed a budget resolution in October to protect their tax reform bill from a Democratic filibuster. As long as the bill doesn’t add more than $1.5 trillion to the deficit over the next ten years, Republicans will only need 51 votes to pass it in the Senate. In other words, they know that their proposed tax cuts will significantly increase the national debt, and they’d rather eliminate tax cuts to the middle class than corporate tax cuts to avoid exceeding their self-imposed arbitrary limit on the inevitable debt increase.
Another indicator that they don’t really believe their proposed tax cuts will pay for themselves is that Republican Sen. Bob Corker (R-Tenn.) has insisted that the final version of the bill contain a “trigger” that forces reconsideration of the tax cuts if it appears they are creating a big increase in the federal budget deficit.
The truth is that the Republican fixation on implementing tax cuts is a long-held political objective, not a proven economic tool. This if further revealed by House’s version of the bill which includes a provision to eliminate the estate tax, which would cost more than $172 billion in lost tax revenue over the next 10 years in order to benefit a relative handful of ultra rich families.
The proven Keynesian strategies of creating economic stimulus by lowering interest rates and increasing government spending aren’t available because they’re already exhausted. Interest rates have been at historically low levels for years in response to the Great Recession, and the federal debt has already reached historical highs. So, instead of doing the hard work of compromising with Democrats to make sound budget deals, Republicans are trying to sell this tax reform bill as a magical panacea. They know that if it doesn’t work, their wealthy dark money campaign donors will still be happy with their lower taxes. Also, it will make it easier for them to cut funding for popular programs they don’t like, such as Social Security and Medicare.
In the meantime, the U.S. economy is doing quite well, and an argument can be made that there’s no immediate need for any tax cuts. The minimum economic growth rate that the Trump administration claims is necessary to shrink the budget deficit has already been achieved. The economy grew by 3.1% in the second quarter, and by 3% in the third quarter of this year. At the same time, unemployment was down to 4.1% in October, the lowest its been in more than 10 years. There are still some stubborn pockets of unemployment, but they are mostly the result of technological advances that have rendered some jobs obsolete, and the laid off workers don’t have the necessary skills to succeed in the new economy. And, by the way, recent corporate profits are at all-time historical highs.
The bottom line is that the Republican tax reform proposals look an awful lot like the failed supply-side “voodoo economics” of the Reagan administration. If Republicans really want to improve the economy, they should find a way to focus tax cuts on the middle and lower income classes, while investing in education, healthcare, public transportation, and affordable daycare. This strategy could increase the federal budge deficit too, if it isn’t accompanied by fair spending cuts combined with the elimination of tax loopholes and unnecessary subsidies. But it would have a much better chance of success. It would help Americans work themselves up from the bottom, instead of giving them false hope that some crumbs might trickle down from above.
On November 30, 2017, the Senate’s parliamentarian declared that the inclusion of the “trigger” provision demanded by Republican Sen. Bob Corker (R-Tenn.) would violate the special budget resolution rules the Republicans want to use to pass the tax bill without any Democratic support.
Late in the evening of December 1, 2017, Senate Republicans finally succeeded in passing their version of a tax reform bill. A conference committee must reconcile it with the version that was previously passed by the House before a final version can be sent to President Trump for his signature.
On December 22, 2017, President Donald Trump signed the $1.5 trillion tax cut bill, named the Tax Cuts and Jobs Act of 2017. It became effective January 1, 2018.
In July, 2018, the U.S. Treasury Department reported that the federal government recorded a $74.9 billion deficit in June, a month when the government often runs a surplus, as corporate taxes dropped sharply compared to a year ago. The government had a budget surplus in June in 52 of the past 64 years.
On September 13, 2018, the U.S. Treasury Department announced the U.S. budget deficit had widened to $898 billion in the 11 months of the current federal fiscal year, which concludes at the end of September, and revenue from corporate taxes had fallen by $71 billion from a year ago.
On November 12, 2018, The New York Times newspaper reported that the biggest effect of Trump’s tax cut was to increase the federal budget deficit.
On February 13, 2019, the U.S. Treasury Department reported that the U.S. government’s public debt had accumulated to an all time record of $22 trillion. This was an increase of $2 trillion since Donald Trump took office in January 2017.
On March 22, 2019, the U.S. Treasury Department reported that the U.S. budget deficit in February was $234 billion, the biggest one-month deficit in history.
State spending on Arizona’s K-12 public school students has fallen 17.5 percent since 2008, the third-deepest rate of school budget cuts in the nation, according to a report by the Center on Budget and Policy Priorities. And a recent U.S. Census Bureau report showed that the state’s school spending rate fell for a third straight year in fiscal 2013, to $7,208 per student, about 33 percent below the national average of $10,700, and 49th out of the 50 states and the District of Columbia.
Furthermore, an Arizona court decision last fall found that the Republican-controlled legislature illegally diverted money generated by Proposition 301 that was intended for schools. Superior Court Judge Katherine Cooper issued a judgment requiring the state to increase funding to K-12 public schools by making an initial payment of $317 million as part of a total of $1.6 billion in payments over five years. But so far the legislature hasn’t sent a penny of this money to the schools.
To make matters even worse, the legislature has simultaneously increased income tax credit programs for school-related donations. This may sound like a good idea, but the donations are creating gross inequities between rich and poor school districts. The Arizona Department of Revenue (ADOR) estimated about $174 million in school tax credits were diverted from the state’s general fund in 2014, with about $123 million of that going to private schools, including religious schools.
Tax Credits Are Too Easy to Claim
But the situation might even be worse than that because of the way the ADOR tracks these school tax credits. Households that claim a tax credit by giving a donation to a public school to help fund extracurricular activities must complete and submit ADOR Form 322. But even though the school districts provide receipts to the people who make these donations, ADOR doesn’t require taxpayers to include copies of these receipts with their tax returns. And while Form 322 requires the taxpayer to name the school district that got their donation, there’s no easy was for ADOR to verify these claims because the district’s name is simply written or typed on the form, and not normalized with an ID code that could be cross-checked with a database. This same process, along with Form 323, is used by taxpayers claiming donations to private school tuition organizations.
Subsequently, Arizona taxpayers can easily claim unverified credits that reduce their annual income tax obligation dollar for dollar. In regards to the public school tax credits, single taxpayers can claim up to a $200 annual credit, and married ones up to $400. Taxpayers claiming a credit for donations to private school tuition organizations can claim up to $528 for a single household, and up to $1056 for a married household. It’s difficult to believe there aren’t a lot of people claiming these credits that didn’t really make the donations – further reducing the public funds available to schools.