The Elbert Files: Unintended consequences
DAVE ELBERT Jan 9, 2018 | 8:55 pm
3 min read time621 wordsBusiness Record Insider, Opinion, The Elbert Files
The new federal tax law has already provided a welcome boost of more than $100 million for Iowa nonprofits, cities and schools districts.
The extra cash is more of an early payment than new money and will ultimately complicate planning for many.
That’s especially true for state officials, where unexpected tax deductions will wreak havoc with revenue estimates that are already shaky.
The new standard deduction is responsible for a lot of recent activity and confusion. To make other changes more palatable, the standard deduction was increased to $24,000 for married couples. That’s nearly double the existing $12,600 standard deduction for couples. But the new law also eliminates personal exemptions of $4,050 per individual.
Taken together, those two changes make the new law pretty much a wash for people like me, who were able to lower our taxable incomes more under the old law than we can now.
It works like this: In 2016, my wife and I claimed about $19,000 in itemized deductions and $8,100 in personal exemptions, which allowed us to lower our taxable income by $27,100.
Under the new rules, we won’t have enough deductions to itemize, so we’ll take the standard deduction and lower our taxable income by $24,000.
The new law took effect Jan. 1, which gave me 10 days after President Donald Trump signed it on Dec. 22 to improve my tax situation for 2017.
So I did what a lot of people did. I increased my charitable donations for 2017 by writing checks early for contributions I would normally have made in 2018.
More significantly, I prepaid my second-half property tax bill, which allows me to add several thousand dollars to my 2017 itemized deductions.
In Polk County alone, roughly 8,200 people had the same idea.
Polk County Treasurer Mary Maloney told me that during a normal year 3,800 property owners prepay their second-half tax bills before Dec. 31. In a normal year, she added, prepayments total about $7 million.
This year, 12,000 property owners prepaid roughly $26 million in property taxes, which is $19 million more than normal.
Their payments will be almost immediately available to the cities, county and school districts that receive property tax payments, Maloney said. Recipients include Polk County, the city of Des Moines and 18 other municipalities, 16 school districts, 36 townships, 14 special districts, 14 fire districts, plus regional transit, community college, county hospital and ag extension districts.
That’s $19 million that local officials would normally receive in early- to mid-April, after the March 31 deadline. But this year they’ll have it early, which helps because state payments to local government have gotten slower and slower in recent years.
Hopefully, local officials will use the early payments wisely and not buy anything that wasn’t already in their budgets.
There is a downside at the state level, though, because $19 million in Polk County prepayments is now exempt from state income tax.
If you add up prepayments from Iowa’s other 98 counties and all of the extra charitable donations Iowans made at the end of 2017, you are probably looking at more than $100 million of income — maybe even twice that amount— that would normally be subject to state and federal income taxes in 2017 but won’t now.
That’s a good deal for the taxpayer, but not for state and federal budgets.
Once you figure out corporate tax law changes, which experts are still trying to decipher, the impact on state tax collections is likely to be even greater than the hole created by changing the standard deduction.
In any case, the level of uncertainty surrounding state revenue projections this year may soon have officials looking fondly at last year’s revolving door of missed estimates.