Jim De Bree | Are Paychecks Really Growing?

Jim de Bree
Jim de Bree
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On July 11, The Signal published a letter written by Drew Mercy under a headline stating, “Thanks to Federal Tax Reform, California Paychecks Are Growing.” (See signalscv.com/2018/07/drew-mercy-thanks-to-federal-tax-reform-californians-paychecks-are-growing/)

As is the case with many letters endorsing candidates, facts were cherry-picked to provide “spin” in a manner that would make Bill and Hillary proud.

There are several misleading statements about the Tax Cuts & Jobs Act in his letter that are likely to be a major component of the Republican Party’s campaign this fall.

The first is the magnitude of incremental benefits extended to workers by companies who want to share their tax savings with employees. Mr. Mercy laments that Nancy Pelosi refers to the workers’ share of tax cuts as “crumbs.”

He cites the Walt Disney Corp. as giving $1,000 one-time bonuses to about 125,000 employees. That is $125 million, which certainly is not chump change.

To gain a perspective on this, let’s look at the situation a bit closer.

Disney paid the bonuses last year when it was taxed at a 35 percent rate. Therefore, its after-tax cost of the bonuses was about $80 million.

However, according to the Institute on Taxation and Economic Policy, the 14 percent reduction in corporate tax rates will save Disney about $1.3 billion annually. Furthermore, Disney will no longer pay U.S. tax when repatriating its future foreign earnings. This is expected to generate an additional yearly $500 million tax savings.

Putting this in perspective, the $80 million after tax cost of the one-time bonus payment is about 4 percent of Disney’s total $1.8 billion annual tax savings. I’ll let you decide whether this represents mere “crumbs” or whether it is a “slice of the loaf.”

Ironically, the biggest benefactor of Disney’s tax cuts may be Rupert Murdoch, who is trying to sell parts of his Fox empire to Disney. Disney’s latest bid is $71.3 billion. The price is likely inflated as the result of tax reform and certainly dwarfs the $80 million bonus outlay.

As a sidebar comment to this analysis, Disney is fighting a battle against unions who want to put a living wage measure on the ballot in the City of Anaheim. I am not a fan of living wage mandates, but if Disney was interested in thwarting the unions’ efforts, it seemingly could have shared some of its tax savings with Disneyland employees. To date, Disney appears reluctant to do so —which is a further indication that labor is not participating in the benefits of the corporate tax cuts.

Coincidentally, on the same day that The Signal published Mr. Mercy’s letter, the Wall Street Journal published an article stating that the impact of the tax cuts may be muted because they were implemented at the wrong stage of the economic cycle.

Mr. Mercy also states that the typical family of four in the 25th Congressional District will pay $2,800 less in taxes this year. His commentary fails to consider that tax savings for many taxpayers will be consumed by increased medical costs. Premiums and co-payments under most insurance policies have increased. Much of that increase is attributed to uncertainties around the status of the Affordable Care Act.

Rep. Steve Knight voted for the American Healthcare Act (“AHA”) which, if passed, would have effectively repealed the Affordable Care Act without establishing a viable replacement. The AHA was a principal driver of the premium increases as it was being considered when insurers were setting 2018 rates.

Knight also voted for the limitation on the deduction for state and local taxes. Unfortunately, that resulted in a tax increase for most California households earning over $125,000 annually.

Mr. Mercy concludes his letter by claiming that “Californians owe a debt of gratitude to Rep. Steve Knight, who helped make the tax reform possible.” Mr. Mercy must not have followed the legislative history very closely. The House version of the Bill (which Knight supported and voted for) did NOT contain the provisions that enabled the average $2,800 tax cut.

The House Bill also contained a more restrictive limitation on the deductibility of state and local income taxes and repealed the deduction for medical expenses. The beneficial provisions which Mr. Mercy cites were either included in the Senate Bill or were added by the Senate members of the conference committee.

Although it is true that Knight voted for the final bill, he did not do much else to make these provisions possible.

I am used to this kind of Clintonian spin from the Democrats, and that is why I have historically always voted for a Republican for Congress. Rep. Knight’s votes for the Tax Cuts & Jobs Act and for the American Healthcare Act are making my congressional vote a difficult decision this November.

Jim de Bree, a Valencia resident, is a semi-retired CPA who had to go back to work to pay for increased taxes and health care costs.

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