The Nov. 12 article on threats to cabin owners, communities across Minnesota lake country and their residents posed by the U.S. House tax bill’s repealing the mortgage interest deduction for second homes was accurate, but did not go far enough in two respects, and this situation highlights absurdities in Minnesota’s tax system and the federal proposals.
First, the hit on cabin owners extends to the state and local tax deduction. The House bill limits it to $10,000 in real property taxes only. The Senate bill repeals it. There is no telling how this effort will turn out, but it is not crazy to speculate that the outcome, assuming Republicans can pass something without a single Democratic vote, could be that both the interest deduction for cabin mortgages and the state and local tax deduction could be entirely eliminated.
Second, all property owners in cabin country, not just cabin owners and local governments, would be adversely affected. Cabin property values inevitably will drop if such changes are made. Because the property tax operates by spreading the amount levied by governments across the value of all property in their communities, property tax rates will inevitably rise, so owners of homes, businesses and farms will get hammered. Cabin property taxes will drop because their values will drop, but the higher rate will limit the cut. Local governments will face an ugly balancing act: Do they cut services so the hit is less or try to maintain services and clobber all of their property owners?
Cabin owners already suffer from a Minnesota tax absurdity. They, alone among residential property owners, are subject to the state property tax, which also applies to businesses. The state sucks $43 million out of cabin owners annually, significant for them, but a pittance in annual state general fund revenue of $22 billion. There is no good policy reason for the state tax on cabins, so it should be repealed. Repeal will be more important if federal reform resembles that described above.
Now for the federal absurdities, the root of which is trying to do permanent major tax reform with one party’s votes. The contention that fewer tax brackets means simplification is absurd because taxpayers take about one minute to calculate their tax from the brackets, no matter how many brackets there are. The absurd part of calculating taxes comes from the special low rates that apply to dividends and capital gains, which takes much more time and which the bills retain.
It is absurd to contend that a big increase in the standard deduction is a big deal for families. Eliminating the personal exemptions means, for a married family of three, that these two changes yield a net of almost no reduction, and for families of four or more a net addition, to taxable income. Increases in some credits sometimes yield a tax cut, but loss of deductions and other credits sometimes pushes toward an increase. This combination of changes makes it impossible to generalize about the impacts for middle-class Americans.
The extreme favoritism of high-income individuals and businesses is absurd in light of taxes for many middle-class taxpayers increasing, immediately or in a few years. The corporate income tax rate is slashed from 35 percent to 20 percent, a 42 percent cut. Under the House bill, some business income taxed to individual owners would see a reduction from 35 percent or 39.6 percent to 25 percent, a reduction of 28 percent or 36 percent. Reform usually includes broadening the tax base, but these bills often narrow the tax base, so less of corporate and individual business income will be taxed, reducing taxes still more. And why should joint return filers with between $470,000 and $1 million in taxable income get a cut from 39.6 percent to 35 percent, about a 10 percent cut for that income, when millions of middle-income taxpayers will pay more? The same goes for massive cuts in and repeal of the estate tax.
It is absurd to contend that such large tax cuts will lead to far greater economic growth, higher wages and reduced deficits, in light of past experience to the contrary and the views of most economists and expert budget hawks like the Committee for a Responsible Federal Budget.
Completely nuts is the House bill’s elimination of the medical expense deduction while millions of Americans have essentially unaffordable health insurance and while most Americans get health insurance as an untaxed benefit of employment.
So what should Minnesotans do? Pound the table. Ask U.S. Sens. Amy Klobuchar and Al Franken and our five Democratic representatives to put forward responsible alternative proposals. Tax reform should address real problems in balanced fashion.
Constituents of Republican U.S. Reps. Erik Paulsen, Jason Lewis and Tom Emmer are really important Minnesotans now. Their districts probably include thousands of cabin owners who voted for them, and multitudes more supporters who have less than $10,000 in property taxes and more than $10,000 in state and local taxes. These Minnesotans are likely to get clobbered in this tax reform. Constituents might ask them to vote no and to publicize how Minnesota cabin owners come out vs. how the oil and gas industry comes out. If Paulsen, Lewis and Emmer vote no, the House bill as drafted might not pass, enabling Congress to enact bipartisan tax reform.
John P. James is a director of Minnesota Lakes and Rivers Advocates. He was Minnesota’s commissioner of revenue from 1987 to 1991 under Gov. Rudy Perpich.