The Blue State Tax Apocalypse That Wasn’t

Plus, Trump, Congress may be close to a huge spending deal

Trump Admin, Congressional Leaders Look to Strike Quick Spending Deal

Congressional leaders and top Trump administration officials met Tuesday to discuss a two-year budget agreement to avoid $126 billion in automatic spending cuts set to take effect in fiscal 2020, and it sounds like they might strike a surprisingly quick deal. The parties agreed to meet again Tuesday afternoon, a sign of how urgently they were looking to resolve the issue.

“Our hope is to make a deal before the day is over,” Senate Majority Leader Mitch McConnell (R-KY) told reporters after a two-hour morning, according to The Washington Post.“I don’t want to be too forward-leaning in predicting an agreement, but it seems to me, without exception, everyone would like to.”

Senate Minority Leader Chuck Schumer (D-NY) was only slightly less upbeat after the meeting with Treasury Secretary Steven Mnuchin, acting White House Chief of Staff Mick Mulvaney and acting budget chief Russ Vought. “It was a good, productive meeting," Schumer said Tuesday afternoon, Politico reports. "There are still some significant issues outstanding, particularly the domestic side spending issues like health care and infrastructure middle-class folks need."

Talks for the day reportedly ended without an agreement, largely as the result of ongoing differences over domestic spending.

A deal, if reached, would establish overall budget levels for the next two years, likely lifting spending caps imposed by a 2011 law. It might also raise or suspend the debt ceiling, eliminating the threat of a market-rattling standoff later in the year.

But a quick deal that once again raises spending caps is bound to leave deficit hawks even more frustrated, even if it does avoid some of the budget brinksmanship of recent years and reduces the risk of another government shutdown. “ADDING TWO TRILLION DOLLARS TO THE DEBT IS *NOT* A POSITIVE DEVELOPMENT,” Marc Goldwein of the Committee for a Responsible Federal Budget tweeted.

The Flip Side of Billionaire Robert Smith’s Student Loan Surprise

The heartwarming story of billionaire investor Robert Smith’s surprise announcement Sunday that he would repay the $40 million or so in student loans taken by the 396 men in the 2019 graduating class at Morehouse College has generated an avalanche of media coverage, both of Smith’s gift and the systemic questions it raises about our education system and the roughly $1.6 trillion in outstanding student loans.

What about those who aren’t fortunate enough to have a billionaire wipe out their debt? Wouldn’t a universal debt forgiveness program or a “free college” policy like those proposed by Democratic presidential candidates Elizabeth Warren (D-MA) or Bernie Sanders (I-VT), among others, be more effective than a lone billionaire here or there trying to help out? Or would such programs be too skewed toward the upper middle class?

“Smith’s gift, while undoubtedly valuable, highlights how infrequently such a massive gift is given, and the difficulty of using the financial benevolence of billionaires to solve systemic issues,” P.R. Lockhart writes at Vox.

As Vox’s Dylan Matthews and others point out, Smith’s philanthropy also raises another, related policy issue: As a private equity fund manager, Smith has opposed closing the loophole that allows him to pay a 20% tax rate rather than higher income tax rate on earnings known as “carried interest.” That loophole is projected to cost the federal government nearly $16 billion in revenue from 2016 through 2025, The New York Times Editorial Board notes.

“Closing that loophole would be a much better graduation present for the class of 2019,” the Times editors argue. “An affordable college education should not require an act of largess. It should not require our applause. It merely requires adequate public investment, funded by equitable taxation.”

The Blue State SALT Apocalypse That Wasn’t

Numerous Democratic lawmakers warned that the President Trump’s tax cut package, which placed a $10,000 limit on state and local tax (SALT) deductions, would create economic havoc in high-tax states such as New York, New Jersey and California.

New York Gov. Andrew Cuomo was perhaps the most visible blue state critic of the new SALT provision, claiming that it amounts to an “economic civil war that helps red states at the expense of blue states.” The sharp cut in the SALT deduction would drive taxpayers from the state, Cuomo said, damaging local communities while lowering state tax revenues by billions of dollars.

Shortly before meeting with the president this past February to discuss his concerns, Cuomo announced that New York State had observed a $2.3 billion shortfall in estimated payments in December 2018 and January 2019 — a shortfall he blamed squarely on Trump and the Republicans in Washington.

But the governor may have spoken too soon. More recent data shows that New York tax revenues actually rose this year, coming in $3.7 billion higher in April compared to the year before. Bloomberg’s Martin Braun said that the increase in revenue was driven in part by timing shifts in tax payments related to the new rules, as well as a booming stock market and the continuation of a decade-long economic expansion.

As some critics pointed out last year, many states are benefiting from the GOP tax overhaul because it broadened the tax base by eliminating some exemptions and limiting deductions. As a result, states have more income to tax. New Jersey, California and Illinois all saw tax windfalls this year, Braun said, despite dire warnings in those blue states about the effects of the SALT deduction limit.

Although state tax revenues seem to be doing just fine in the wake of the SALT new rules, pricey blue state neighborhoods and high-end realtors may be feeling some pain: New York City has become a buyers’ market for real estate while the Hamptons is “in a rut,” and Braun said that home prices fell more than 7% last year in Westchester County, an affluent suburb.

High-income citizens in blue states don’t, however, appear to be headed for the hills — or, more precisely, tax-free states such as Florida — in any great numbers. While the real estate firm Redfin says that 13% of people looking for homes in New York and California report they are now considering lower-tax options, migration rates haven’t changed and are now below their pre-recession levels, Braun said. Taxes have less impact on where people choose to live than you might think, said Moody’s analyst Marcia Van Wagner, coming in behind more mundane concerns such as the weather.

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Why the Federal Reserve Is Expected to Buy Trillions More in US Debt

The Federal Reserve is selling off about $1 trillion worth of mortgage-backed securities it acquired in the wake of the financial crisis as it brings its quantitative easing program to a close, but that doesn’t mean we’ll see much of a reduction in the Fed’s overall balance sheet. According to an analysis by Wells Fargo, the Fed is expected to replace much of the mortgage-backed securities with U.S. Treasuries. The bank said the Fed could purchase as much as $2 trillion worth of Treasury debt over the next decade.

Why would the Fed do this, rather than permanently shrinking its balance sheet? Bloomberg’s Liz McCormick and Alex Harris provide an explanation:

“Part of it simply has to do with accounting. While attention has been focused on the asset side of the Fed’s balance sheet, it also has liabilities, which mainly come in the form of currency in circulation and bank reserves. As with any balance sheet, the two sides need to net out. Since those liabilities tend to naturally increase over time with the economy, so too must the Fed’s assets.”

The purchases could be good news for the cost of servicing the nation’s ballooning debt. Priya Misra, global head of rates strategy at TD Securities, said that the Fed will once again become the largest buyer of Treasuries, which should be bullish for the Treasury market and put downward pressure on interest rates. Misra expects the Fed to buy as much as $300 billion of Treasuries next year — about a third of the $1 trillion in debt the U.S. is forecast to issue.

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