Greg Cabral is a Rhode Island managing partner for BlumShapiro, an accounting and business advisory firm. He talks with Providence Business News about the highlights of President Donald Trump’s new tax proposal and how it might impact Rhode Island, its people and its businesses.
PBN: How does President Donald Trump’s tax plan compare to past tax reform proposals at the federal level?
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CABRAL: President Donald Trump’s tax plan is being called the “biggest individual and business tax cut in American history.” The plan’s stated goal is to grow the economy and create millions of jobs, while simplifying our very complicated tax code and providing tax relief to American families, especially middle-income families. The plan also includes reducing the U.S. business tax rate from one of the highest in the world to one of the lowest. One would think this plan would gain the necessary support needed to become a reality; however, as with all tax plans of this magnitude, there are several moving parts that need to be considered and details that need to be worked out.
PBN: Can you give our readers some of the highlights from his plan, and how likely it is to garner the support necessary to pass?
CABRAL: A few of the plan’s most noteworthy highlights include:
- Reducing our seven existing tax brackets to just three: 10 percent, 25 percent and 35 percent
- Doubling standard deductions, while continuing to provide tax relief for families with child and dependent care expenses. Additionally, deductions related to homeowners and charitable giving would continue to be allowed
- Repealing the federal estate tax, the alternative minimum tax and the 3.8 percent Obamacare tax on investment income
From a business perspective, the proposed plan would reduce the business tax rate to 15 percent. And, in an effort to level the playing field for American companies, the plan would create a territorial tax system that provides a one-time tax on the repatriation of funds being held overseas. As far as garnering support, it will depend on the plan’s ability to fulfill its promise as being revenue-neutral. Details within the plan still need to be ironed out – and if it cannot be shown to be revenue-neutral, full passage will prove difficult.
PBN: What would the repeal of the estate tax mean for Rhode Island? Would a federal repeal supersede state-level estate taxes?
CABRAL: Most states depend on federal estate tax rules to administer their own estate taxes – so a repeal could make it difficult for states to administer and enforce their own rules. We saw this situation several years ago, when there was a one-year elimination of the federal estate tax. During that time, various state-level estate taxes remained in place – but several local estate laws continued to refer to the then-repealed federal rules. This created complexity from an administrative and compliance perspective. I would expect to see a similar result with the repeal of the federal estate tax.
PBN: How should business owners be thinking about the pass-through corporation tax?
CABRAL: As previously stated, this plan will reduce the business tax rate to 15 percent. This new rate would affect C corporations and other businesses that are structured as S corporations, partnerships and limited liability companies. Therefore, if the business is currently structured as a pass-through entity, the current plan does not require these businesses to change structure to take advantage of this new tax rate. The business income will continue to flow through to the business owner’s tax return, and this income will be taxed at the 15 percent rate. Most pass-through businesses distribute cash to their owners in order to pay the applicable tax related to the business income on their individual tax returns. This is a significant reduction in taxes and should provide businesses more available profit that can be reinvested for growth.
PBN: Should state leaders be concerned about what type of impact these cuts could have on state revenue? Why or why not?
CABRAL: The major cut in the president’s tax plan that is not discussed above is the elimination of the state income tax deduction for determining federal taxable income. In high-tax states, this can be an individual’s largest deduction. Individuals who lose this deduction could actually see a tax increase under this proposed tax plan – even with the federal rate decreasing. Therefore, if this plan delivers as promised by growing the economy and creating new jobs, businesses and individuals may need to expand into lower- or no-tax states. Additionally, businesses and individuals with the ability to move may look to these lower- or no-tax states as possible places to relocate.
Eli Sherman is a PBN staff writer. Email him at Sherman@PBN.com, or follow him on Twitter @Eli_Sherman.
