EDITORIAL: Tax reform remains a risky gamble

Dec. 20--Republicans were set to muscle through their tax bill by partisan majorities in the House and Senate on Tuesday, and while it has improved a bit, the bill remains a budget-buster that offers too little for average Americans.

Whether conceding to conscience, persuasion or plain old fear about their political futures, lawmakers did restore some items dear to middle-class taxpayers. Outsized medical expenses will remain deductible, as will interest on student loans. Grad students won't be taxed on tuition waivers, and college endowments will not be penalized. Middle-class taxpayers will retain the ability to deduct up to $10,000 in state and local taxes, and the child tax credit has been enlarged.

But the larger concerns are grave. The plan could add $1.5 trillion to the national debt. That by itself is an act of irresponsibility from those who once called themselves fiscal conservatives. An estimated 75 percent of filers would see a smaller tax bill for 2018, but that equation changes over time as individual tax changes expire. Corporate tax cuts, it should be noted, are permanent.

The Republican defense, as articulated by Minnesota Republican U.S. Rep. Erik Paulsen, is that an economy with weak growth needs a boost. Unfortunately, there are no guarantees this bill will perform that service. And for Minnesotans, the price it extracts could be dear. The federal changes could trigger a rise in state taxes for most Minnesotans unless the Legislature acts.

The bill also hurts Minnesota because of the state's healthy homeownership rates. Homeowners will lose deductibility of home equity loan interest. Mortgage deductions and property tax deductions will be capped. The bill also eliminates the insurance mandate for the Affordable Care Act, an unconscionable move that could drive up insurance premiums and cost an estimated 227,000 Minnesotans coverage.

Paulsen, who as a member of the House Ways and Means Committee had a hand in shaping the bill, said that while the bill is imperfect, the changes would update the tax code and provide for faster growth. "Good tax reform should make a complex economy more efficient and put more money in people's pockets," he said. "This bill does that." Most economists, it must be said, do not share Paulsen's rosy assessment.

It should be noted that Paulsen pushed to retain higher-education tax provisions that earlier versions would have jettisoned. Similarly, he fought to retain tax advantages for private activity bonds, used to fund professional sports stadiums, as has been reported elsewhere, but used more frequently to develop public-private projects such as low-income housing and charter schools.

Paulsen also got a provision that will make it easier for lower-level employees in startups to get equity in their companies without suffering a tax penalty. But he wasn't the only one asking for provisions, and the new bill is now littered with a slew of exemptions for various groups.

Republicans have set high expectations for this bill: tax cuts for a majority of Americans; higher wages and more jobs at a time when the economy is already nearing full employment; faster and higher growth levels than most economists think reasonable; and increased competitiveness for U.S. corporations that will fuel a market surge.

The consequences of falling short in any of those areas could be severe, bringing higher deficits and vastly increased pressure to slash domestic spending in areas that would hurt middle- and lower-income Americans far more than temporary tax cuts might help them.

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