President Donald Trump signed a $1.5 trillion tax cut into law Dec. 22, resulting in immediate reform, including new federal income tax brackets, a lower corporate tax rate and tax deductions for small businesses. It also modified bond refinancing procedures, which school districts use to save taxpayer money.
U.S. Rep. Kevin Brady, R-The Woodlands, who authored the tax overhaul, addressed community members during the annual Economic Outlook Conference in The Woodlands on Feb. 16. Brady said one of his biggest priorities was to grow the economy by lowering tax rates for businesses and families.
“Early results have been really encouraging,” Brady said. “We have millions of Americans who already have seen bonuses and higher paychecks. We have hundreds of companies who have announced new investments here in the United States in a major way. There’s a new optimism among our businesses, especially small businesses.”
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 the 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 residents
A major component of the overhaul is a set of lower federal income tax rates for most income levels, Brady said.
The median household income in The Woodlands—$109,605, according to 2016 data from the U.S. Census Bureau—paid 25 percent of its income in federal taxes in 2017, but a household earning the same amount in 2018, if the household filed a joint tax return, will pay 22 percent of its income in federal taxes.
Brady said families with children will also 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 39.3 percent of families in The Woodlands with children younger than 18 years old, according to census 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 $440,000 home in The Woodlands would have to pay about $10,164 a year, without exemptions, in property taxes based on 2017 tax rates for Conroe ISD, Montgomery 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.
Less than half of homeowners in The Woodlands will be affected by this change. According to census data, about 20-30 percent of the homes in The Woodlands are valued at more than $440,000, according to Census data.
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,” Lavine said.
Besides implementing changes for residents, a portion of the tax reform plan focuses on offering incentives to small and large businesses, Brady said. Small-business owners who file their taxes as a single entity with an income below $157,500 or who file their taxes jointly with an income below $315,000 could be eligible for a 20 percent tax deduction.
The plan also includes a cut to 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. The provisions could allow companies to spend the monies saved to boost employee wages and benefits, Brady said.
Gil Staley, CEO of The Woodlands Area Economic Development Partnership, said he has heard positive responses from businesses and companies in The Woodlands regarding the new tax plan.
“I’ve attended several meetings, and there has been an overwhelmingly positive response by small- and large-business owners,” Staley said. “So from all indications, it has been very popular. I’ve seen my own paycheck change. Hopefully, consumers start to utilize this.”
Staley said as a result of the tax reform plan, he expects to see more big businesses who are overseas relocate back to the U.S., resulting in a better economy for Americans.
Both small business and big corporations located in and around The Woodlands are expected to feel the effects of tax reform. Jankowski said a lower corporate tax rate will increase the profits of local corporations, such as ExxonMobil—which has a campus in the nearby Springwoods Village on I-45 as well as offices in Hughes Landing.
ExxonMobil CEO Darren Woods cited the new tax plan in a statement Jan. 29 when he said the company plans to invest more than $50 billion over the next five years to grow its business within the U.S.
“These investments are underpinned by the unique strengths of our company and enhanced by the historic tax reform recently signed into law,” Woods said.
While large corporations have been vocal about what the new law will mean for big business, the changes are expected to affect smaller, local businesses as well.
Greg Zachary, owner of local business The Oilerie in The Woodlands, said as a result of the new tax reform plan, he and his wife have plans to eventually hire more staff for The Oilerie and open more locations in the future with the money they will now be saving on their taxes.
“Everything will be accelerated because of the new tax reform and there are a lot of positives for the future,” he said. “ It’s going to boost our local economy, there is no doubt about that.”
School, local bonds affected
A provision in the tax reform also limits the ability of local school districts, cities and counties to refinance their bonds by eliminating the ability for entities to advance refund tax-exempt municipal bonds.
The provision was created to stop governmental entities from abusing federal tax exemptions, Brady said.
“What we’re seeing throughout the country are entities that refinance [their bonds] and, in effect, double-dip on that tax-exempt financing for the state project,” Brady said.
Bonds are typically sold with 10-year call dates, meaning districts or counties can decide whether to refinance the bond after that time. However, advance refunding previously allowed entities to refinance bonds earlier to benefit from lower interest rates. The tax overhaul has eliminated the ability to advance refund tax-exempt bonds.
Voters approved CISD’s $487 million bond referendum in 2015, which funded land purchases, construction of new campuses, renovations to existing campuses and districtwide upgrades.
Advance refunding bond issues has saved CISD roughly $100 million in interest over the last decade, CISD Chief Financial Officer Darrin Rice said. Advance refunding debt allows the district to move forward quicker with projects funded from its bond referendums, Rice said.
While the new laws are not expected to adversely affect the district, Rice said the provision is limiting for how taxpayer dollars can be used without interest savings.
“[The tax code] will not hinder our growth, because we planned and we budgeted for the rates that we currently have on our bonds, but it takes away the ability for us to save taxpayers money on the interest on those bonds,” Rice said.
Additional reporting by Abigail Loop