Editor’s note: This is the first in a two-part series on the effects of the 2017 tax law.
Two years into the 2017 Tax Cuts and Jobs Act, economists and government policymakers are coming to a predictable conclusion. The law is not only exploding the national debt, it also has cost homeowners a trillion, yes with a T, dollars in home equity values.
I say it was predictable because from the outset tax experts complained that Trump administration officials trying to sell the bill to congress were repeating the same mistakes seen in Ronald Reagan and George W. Bush’s tax cuts decades earlier. Remember how George H.W. Bush famously called Reagan’s tax cut plans “voodoo economics?”
Despite overwhelming evidence to the contrary, Republicans faithfully believe tax cuts will lead to greater economic growth that will pay for tax cuts. Reagan and W’s tax plans failed to cover the cost of cuts that went principally to the top 20 percent of Americans. Instead, tax cuts added trillions to the federal debt and set a dangerous precedent for states to follow.
Kansas and Louisiana are two of the best (or worst) examples of supply-side economics derailing tax collections and blowing huge holes in state budgets. Things went so badly in Kansas, school districts had to dismiss classes weeks before the end of the academic year. The state Supreme Court ruled that tax increases were mandated to fully fund schools under the state constitution.
Republican Gov. Sam Brownback was so reviled that he resigned before the end of his second term, but the damage was already done. Kansas, a deep red state, elected a Democratic governor at the next election who is working with moderate Republicans in the Legislature to restore fiscal sanity to the state budget.
In Louisiana, GOP Gov. Bobby Jindal limped through his second term but not before leaving a $2 billion budget deficit created by unfunded tax cuts. His successor, Democrat John Bel Edwards, and the Legislature worked in a bipartisan manner to enact temporary sales tax increases to keep from slashing the state’s health care and higher education systems.
Looking at the math behind the 2017 tax law, the promise that economic growth would pay for the tax cuts were “disappointing, disingenuous and damaging,” according to Maya MacGuiness, writing in a blog for the Committee for a Responsible Federal Budget.
MacGuiness noted that the Penn Wharton Budget Model projected at least a $1 trillion cost of the tax bill over 10 years even with economic growth.
“When Treasury Secretary Steve Mnuchin claimed the tax cut would reduce the deficit by a trillion dollars, “the conversation went from massively misleading to completely removed from economic reality,” she said.
For those who justify the deficit-increasing tax cuts as part of a “starve the beast” strategy, that strategy also backfired. Lowering taxes without a commensurate spending cut actually increases spending due to higher interest costs from the added borrowing.
In addition, tax cuts appear to have broken the dam on additional spending rather than starve the beast. Just two months after Republicans enacted a large deficit-financed tax cut, both parties went on a spending spree. The GOP wanted more spending on defense while Democrats demanded equal spending increases on non-military items. Together, congress raised spending by 13%.
Just a few months ago, lawmakers followed with a similar spending deal that will cost about $1.7 trillion over the next decade. So with the nearly $2 trillion tax cut added to the nearly $2 trillion spending increases, on top of the structural deficit Congress has been ignoring for years, the 2019 budget deficit of 4.7% of gross domestic product is the highest in history for this point of the economic cycle.
What’s particularly alarming is that these deficits are happening when the economy is at full employment and economic indicators remain strong. This is the time Congress should be paying down the debt and shoring up Social Security and Medicare, the very things Bill Clinton called for the last time we enjoyed a budget surplus in the late 1990s.
At some point, our national debt will become unsustainable, especially if interest rates rise and the cost of borrowing goes through the roof. The resulting crash will make Kansas and Louisiana problems look like child’s play.
Next: A look at the tax law’s effect on home ownership.