Why Blue States Should Think Twice Before Starting a Tax War

By Yuval Rosenberg and Michael Rainey The Freedom Caucus Is Flirting with Another Government Shutdown Congress has a week to avert another government shutdown — but only [three working days]( since both parties are taking time to go on retreats to plan their legislative strategies for the year. The most likely path to keeping the government running involves yet another short-term spending bill — the fifth since September. This one would keep the government running until sometime in March, though the length of the extension reportedly has yet to be finalized. But as Republican leaders consider their options, they’re facing a renewed threat from within their own ranks, [Politico’s Sarah Ferris and Seung Min Kim report](. Bipartisan negotiations over a broader two-year deal to raise spending caps and protect so-called Dreamers from deportation have stalled. Now the GOP’s intra-party tensions over both the budget and immigration are flaring up again. Some Republicans, worried that lurching from one short-term spending bill to the next harms the military, are pressing leaders to include a full year of defense funding in the upcoming stopgap measure. Meanwhile, House Freedom Caucus Chairman Mark Meadows is also threatening to withhold the 40 or so votes from his group unless House Speaker Paul Ryan advances a conservative immigration plan that stands no chance of getting through the Senate. Meadows might have a bit of leverage, since Democrats insist they won’t vote for another continuing resolution without progress on the immigration issue. On the other hand, House conservatives likely won’t want to be seen as causing another shutdown, and the Freedom Caucus relented after making a similar push for concessions last month. Republicans leaders are confident they’ll get the votes to keep the government running after February 8, [according to Roll Call](. And Meadows himself also predicted that the government won’t shut down next week. But the frustrations are rising. Debt Ceiling Coming Up Fast Government funding isn’t the only important deadline that’s approaching rapidly. According to a [report]( released by the Congressional Budget Office on Wednesday, the U.S. Treasury could run out of money in just a few weeks if the debt ceiling isn’t raised. The new analysis moves the date the Treasury likely bumps into the $20.5 trillion debt ceiling forward several weeks to the first half of March. Earlier estimates gave the Treasury a little more breathing room, locating the date in late March or early April. But the tax cuts signed into law in December will reduce federal revenues by $10 billion to $15 billion a month starting in February, according to the CBO. The Treasury is currently deploying “extraordinary measures” to manage cash-flow in order to avoid hitting the ceiling, including suspending the issuance of some types of bonds and reducing investments in several retirement funds. Earlier this week, Treasury Secretary Steven Mnuchin asked Congress to raise the debt ceiling by the end of February. Lawmakers are expected to negotiate a deal in the next few weeks, but there’s a chance the debt ceiling could get caught up in the larger struggle over government spending. If Congress fails to raise the debt ceiling soon, the government would face the possibility of default on U.S. debt. A Warning About All That New Debt As budget deficits rise this year and for the next several years thanks in part to the recently passed GOP tax cuts, the U.S. Treasury will have to ramp up its borrowing. A group of private banks that advise the Treasury now estimates that the department will need to borrow $955 billion this fiscal year, up from $519 billion last year — and that the total will rise to $1.083 trillion in 2019 and $1.128 trillion in 2020. That outlook for government debt is affecting financial markets and driving interest rates higher, [The Wall Street Journal says](. “For decades, the U.S. government could issue as much debt as it needed to finance deficits without worrying about how it affected financial markets or the economy. That might be changing,” Kate Davidson and Daniel Kruger write. One bond manager warns that if Treasury yields rise and inflation shoots higher — still a big if — long-term interest rates could climb high enough to limit economic growth. Tweet of the Day Via [Martin Sullivan]( chief economist at Tax Analysts. Why California and New York Should Think Twice About Their War on the SALT Deduction Limit As we’ve noted before ([here]( [here]( and [here]( some high-tax states are looking for ways around the $10,000 limit on state and local tax deductions imposed by the Republican tax bill. New York Gov. Andrew Cuomo has threatened to sue the federal government over the new rules, saying they are part of an “economic civil war” designed to hurt wealthier states. This week, lawmakers in [California]( advanced a bill that would allow residents to make charitable donations to the state in exchange for tax credits to use on their federal returns. Other states are exploring that approach, as well as the possibility of using payroll taxes to reduce state income taxes. The blue state effort to get around the new rules has gained a lot of attention, but tax experts have their doubts about both the legality of the proposed workarounds and the effects they might ultimately have. The conservative [Tax Foundation]( pointed out last week that, if successful, the efforts would be regressive, with the benefits flowing overwhelmingly to wealthier taxpayers. Earlier this week, Leonard Burman and Frank Sammartino of the centrist [Tax Policy Center]( made much the same point, arguing that the $10,000 limit on state and local tax deductions is “one progressive element of a law that disproportionately benefits the rich.” More broadly, TPC warns that state lawmakers may be opening a can of worms – especially if Congress responds by changing the rules again -- and the end result could leave local taxpayers worse off while siphoning tax revenues from the federal government. “If they are not careful, they could create a complex web of state tax benefits that mostly help the well-to-do, exacerbate the federal government’s fiscal woes, and may lead to unintended consequences,” Burman and Sammartino write. Send Us Your Tips and Feedback: Email Yuval Rosenberg at yrosenberg@thefiscaltimes.com and follow me on Twitter [@yuvalrosenberg](. Follow The Fiscal Times on Twitter [@TheFiscalTimes](. Republicans Throw in the Towel on Obamacare Repeal Though GOP lawmakers have dreamed of repealing the Affordable Care Act since the day it became law in 2010, it looks like they’re giving up on that dream – at least for 2018. At a Republican congressional retreat in White Sulphur Springs, West Virginia, lawmakers said they don’t think another repeal effort is in the cards this year, given the many difficulties they faced last year, according to [Politico](. “It would be a heavy lift. I think everybody knows. We sort of tested the limits of what we can do in the Senate last year. And we’re one vote down from where we were then,” said Sen. John Thune (R-SD). Hardliner Rep. Mark Meadows (R-NC) agreed, though he left open the possibility that the picture could change after the fall election. “If we keep the majority in the House and they get a larger majority in the Senate then you might look at a reconciliation vehicle after November,” Meadows said, referring to the legislative vehicle Republicans could use to give Obamacare repeal one more try. News - [Dems Vow to Repeal Parts of GOP Tax Law]( – The Hill - [Some 2017 Tax Filers May Lose Key Tax Breaks]( – Roll Call - [Trump's $1.5 Trillion Public Works Plan Doesn't Say Who Pays]( – Bloomberg - [House Transportation Chair Hopes to Move FAA Funding Before Infrastructure Bill]( – Roll Call - [Trump Administration Strips Consumer Watchdog Office of Enforcement Powers in Lending Discrimination Cases]( – Washington Post - [Republicans Tack a Conservative Campus Wish List to a Major Education Bill]( – New York Times - [Labor Dept. Ditches Data on Worker Tips Retained by Businesses]( – Bloomberg - [New York Docked $14 Million for I Love NY Highway Signs]( – Democrat & Chronicle - [100 Million Families Could Receive Free Health Care in India]( – Axios - [Alan Greenspan: 'We Have a Stock Market Bubble']( – CNN Money Views - [The GOP’s Big Tax-Cut Gamble Appears to Be Paying Dividends]( – Aaron Blake, Washington Post - [A No-Drama Way to Deal with the Debt Limit]( – Jonathan Bernstein, Bloomberg View - [It's Naive to Assume SALT Changes Will Reduce State Spending]( – Ray Keating, Real Clear Markets - [Taxing Land to Pay for Trains Will Work. In Some Places]( – Tyler Cowen, Bloomberg View - [California's Tax-Avoidance Scheme for the Rich]( – Keith Rosenkranz, The Hill - [Trump’s New Infrastructure “Plan,” Explained]( – Matt Yglesias, Vox - [Trump Is Making 2018 Much Harder for Republicans]( – Ronald Brownstein, The Atlantic - [If the Fed Is Right, Then Markets Are in Trouble]( – Jim Bianco, Bloomberg View - [Job Numbers Distract from Ongoing Labor-Market Problems]( – Jeffrey Kucik, Real Clear Policy - [America's Digital Infrastructure Is Crumbling, Too]( –James Stavridis and Dave Weinstein, Bloomberg View Copyright © 2018 The Fiscal Times, All rights reserved. You are receiving this newsletter because you subscribed at our website, thefiscaltimes.com. 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