President Donald Trump signed the $1.5 trillion tax cut into law Dec. 22, overhauling the nation’s tax code for the first time in decades. Many of the reform’s changes took effect immediately, including new federal income tax brackets, a lower corporate tax rate and tax deductions for small businesses.
The law will also affect taxpayers by expanding the child tax credit, placing a cap on how much individuals can write off in state and local taxes and limiting how taxing entities can refinance their bonds, officials said.
The incentives for small businesses were implemented to spur national economic growth, said the bill’s sponsor, U.S. Rep. Kevin Brady, R-The Woodlands.
“Our goal was [to create] more jobs, bigger paychecks and to make America the place for the next big job or next manufacturing plant,” Brady said.
Patrick Jankowski, senior vice president of research for the Greater Houston Partnership, said it is too soon to tell how the tax reform will affect the Greater Houston area, but a lower tax burden could give consumers more money to spend, which could stimulate the economy.
“Depending where you are [in tax brackets], that could make a difference between being able to take your family out to eat one more time a month or enough of an impact where you could buy that new truck you’ve been looking at,” Jankowski said.
Effects on individuals
A major component of the reform is a set of lower federal income tax rates for most income levels, Brady said.
The median household income in Cy-Fair—about $73,700, according to a 2017 report from the demographics firm Population and Survey Analysts—paid 15 percent of its income in federal taxes if the household filed as married in 2017. But a household earning the same amount in 2018, if filing as married, will pay 12 percent of its income in federal taxes.
Brady said families with children will see an increase in the child tax credit, which taxpayers can use to reduce their federal income tax bills. The credit previously provided up to $1,000 for each child younger than 17 years old in a household, but the new plan doubles the credit to $2,000. This benefit could help the 38.9 percent of families in Cy-Fair with children younger than 18 years old, according to U.S. Census Bureau data from 2016.
Another aspect of the new tax plan that will affect individuals is the $10,000 cap set for state and local tax deductions. Placing a cap on this deduction—which allows homeowners to deduct property tax expenses on their federal taxes every year and previously had no cap—could affect a number of Texans who pay more than $10,000 a year in property taxes, said Dick Lavine, senior fiscal analyst at the Center for Public Policy Priorities, an Austin-based policy center.
For example, the owner of a $450,000 home in Cy-Fair ISD would have to pay about $10,080 a year, without exemptions, in property taxes based on 2017 tax rates for Cy-Fair ISD, Harris County, emergency services districts and other taxing entities. With this new plan, the homeowner would not be able to write off that full amount.
“Your out-of-pocket property tax is going to go up, and you’re not getting better police and fire protection, and it’s not helping your schools—you’re just paying more,” Lavine said.
This will not affect the majority of homeowners in Cy-Fair. According to U.S. Census Bureau data, about 18 percent of the homes in Cy-Fair are valued at more than $300,000.
Lavine said this cap could also make it difficult for taxing entities to raise property taxes to fund public services.
“The impact is that people maybe will be more reluctant to fund state and local services through voting, approving higher property taxes or voting for city council or whoever is going to raise their taxes,” Lavine said.
Harris County Precinct 4 Commissioner Jack Cagle said voters are already reluctant to approve raising property taxes, but will vote to do so if it provides funding for major issues, such as flood control. He also said he would like the county to move away from its reliance on property taxes.
According to a 2018-19 budget presentation considered by Commissioners Court on Jan. 30, property taxes make up 79 percent of the county’s general fund.
Business Benefits
Along with the changes to individual income brackets, this new plan includes a large decrease to the corporate tax rate and provides incentives for small businesses.
The plan cuts the corporate tax rate, which is the percent of a company’s income that is paid to the federal government, from 35 percent to 21 percent. Also, small businesses have the chance to qualify for a 20 percent tax deduction on their income. Business owners who file their taxes as single with an income below $157,500, or file their taxes as joint with an income below $315,000 could be eligible for this deduction.
Jankowski said a lower corporate tax rate will increase the profits of local corporations, such as Noble Energy and Consolidated Mills, which both have facilities in the Cy-Fair area. Companies could potentially take these higher profits and reinvest in the company by buying new facilities or equipment, he said.
Keith Vrana, who owns Consolidated Mills—a food contract packaging company in Cy-Fair that employs about 30 people—said the tax reform will help him pay his employees more.
“It puts more money in my employees’ pockets,” he said. “I’m seeing anywhere from $50 [to] $100 extra in people’s paychecks. It depends on their hours and it depends on their wages, but definitely everybody got a little raise.”
Texas Sen. Paul Bettencourt, R-Houston, said he thinks the lowering of the corporate tax rate is going to benefit the manufacturing industry. However, he said service industry businesses will not have their tax rates lowered to 21 percent, which he said will mitigate the tax relief those businesses receive.
Bettencourt said he thinks the tax rate for service industry businesses is something that lawmakers are going to continue to debate moving forward.
“I know there’s a lot of midsize manufacturing as well as very large companies that are going to benefit by … lowering the tax rate [from] 35 [percent] to 21 [percent],” he said. “The service business is not getting the same type of deduction.”
Lawrence Dean, regional director of Metrostudy Houston, a real estate and housing market research group, said it is too soon to tell how this new tax policy will affect Houston’s real estate market.
Dean said the reform will primarily affect metropolitan areas with much higher home values than Houston—such as New York City or Los Angeles. However, Dean said he believes the property tax deduction cap could become an issue for suburban areas, like the Cy-Fair area, where property taxes function as school districts’ revenue sources.
However, he said he does not believe the deduction cap will deter residents from moving into more expensive homes with higher property taxes.
“Homebuying is ... an emotionally driven process, so I anticipate that would not be on the top of people’s minds as they decide what home to buy,” Dean said.
School bonds, revenues
Although property taxes are a significant revenue source for school districts—comprising 57 percent of Cy-Fair ISD’s revenue—the district’s Chief Financial Officer Stuart Snow said he does not believe CFISD will be affected by the deduction cap.
One aspect of the new tax policy that affects districts is a change in when they can refinance their bonds, which could limit their ability to save on bond interest.
Under the new code, school districts are no longer able to advance refund their bonds, which was often done to take advantage of favorable interest rates, Snow said.
“It’s a minor issue in terms of what we actually do,” he said. “We occasionally issue taxable bonds, but we’ve not [issued] advance refunded bonds in quite some time.”
Bonds are sold with 10-year call dates, meaning the district can decide whether to refinance the bond after that time. However, advance refunding allowed districts to refinance bonds earlier to benefit from lower interest rates.
Previously, if CFISD were to save money on interest rate costs, it would allow the district to move forward quicker with projects funded from its bond referendums. However, missing out on these savings will not delay any of the projects funded by the $1.2 billion bond voters approved in 2014 because the bonds are interest-free, Snow said.
“We have some qualified school construction bonds and Build America Bonds, and those are bonds that we’ve sold that are interest-free,” he said.
