Tithers with Big Families Beware.
I’ve spent the morning reading H.R.1, the “Tax Cut Jobs Now Act” and trying calculate the difference it would make for different families. Setting aside the debate about the need for a corporate rate cut, it seems to be a mixed bag on the personal income tax side. Here’s how I see it hitting families.
First, people with taxable income in the current 10% tax bracket probably won’t see much change. They could endure a small increase with the new 12% bracket, but they are often and will continue to be able to largely eliminate their income with the standard deduction. That said, the proposal certainly doesn’t offer them much help.
Second, Republican leaders aren’t wrong to say that some in the “middle” (or maybe “upper middle”) class could save on their taxes with the new proposal. I ran a few scenarios and found that a family of three with a current Adjusted Gross Income around $110,000 could save about $900. I assumed they were tithing to the church and paying some interest on a home loan of about $160,000. The new proposal keeps both the charitable contribution and home interest deduction, but enhances the standard deduction such that this family would be deducting about the same amount under both systems. They would lose their personal exemptions, but the new brackets do help them out…a little. Like I said, they save about $900, but still pay more than $10,000 just in federal income taxes every year.
That said, a larger family, with four kids, who has a similar or slightly larger AGI and has been able to take advantage the charitable contribution deduction, the home interest deduction and others that would be eliminated under the proposal (medical expenses or costs of being an employee), may actually have to pay more in taxes. Why? Those families are already deducting more than the new standard and the loss of some deductions may mean their taxable income increases. When the loss of the personal exemptions for a larger family is added to the mix, the new brackets cannot make up for increased taxable income. You can compound the problem if the family has adopted a child. The new proposal eliminates the tax credit for adoption expenses, something that has incentivized what seems like incredibly generous behavior that people of many different faith convictions would affirm.
I’m also worried the new proposal will render the charitable contribution an irrelevant deduction for the vast majority of middle class households. Don’t get me wrong. I don’t think the deduction has been that great of a motivator, especially for those giving to their churches. Those of us who give at 10% or more aren’t motivated by tax savings. That said, I also know that it doesn’t take much to incentivize givers to spend their money elsewhere.
The drafters did try and throw a bone to Evangelicals. They proposed a partial revocation of the “Johnson Amendment,” and that would allow for slightly increased political activities in churches. Local churches still couldn’t throw a political rally for a candidate, but the pastor could, under the new proposal, do things like endorse a candidate during a sermon. As someone who has preached in a fair number of churches, liberal and conservative, this change almost makes me laugh. It sounds to me like permission to engage in pretty foolhardy behavior. In fact, that sort of politicizing might be an even bigger disincentive for people to contribute to their church. Under the new law, we, as a country could thus lose the incentive to adopt children and to give generously to local churches and other charities. Given that, I certainly don’t think this extra leeway makes up for those potential losses.
As for pastors, if the housing allowance exclusion is lost to the First Amendment, we will be among those paying more, regardless of this proposal. I held out some dim hope that the Republicans, with their ties to the Evangelical community would actually take advantage of the opportunity to add a legislative fix to a constitutionally troubled law. They did not, and the Wisconsin court’s decision still stands. I suspect the need for additional revenue to make up for the corporate and estate tax cuts is going to make fixing the exclusion in a way that’s constitutionally acceptable, extremely difficult.
Don’t get me wrong, H.R. 1 is not all bad, but critics are right that it primarily benefits business owners and people receiving estates of several million dollars. Still, many people will save a few hundred dollars in taxes. And, some of the changes probably should happen. That said, I don’t think this proposal is all that friendly to churches, and no one should believe the rhetoric of a middle class “Christmas present,” until they see how it effects them personally. Quite honestly, that sort of rhetoric may well lead to a pretty significant disappointment, even or those who might save a little.