What’s Going On With Tax Reform? Part 3

Yesterday, Steven M. Rosenthal of the Tax Policy Center opined on a potential element of tax reform that understandably has received less attention from local government advocates than elimination of the deductibility of state and local taxes (SALT) and the tax exemption for municipal bonds. Yet, White House National Economic Council Director Gary Cohn has argued that this element of tax reform will most benefit “the policemen … the firemen and the teachers.”

What is it? Is this true? And as employers of the policemen, the firemen and the teachers, should local governments care?

Cohn was referring to potential tax relief to U.S. corporations for reincorporating their off-shore earnings into the U.S. tax system. This provision would allow corporations holding off-shore profits to repatriate previously untaxed foreign earnings with a U.S.-based parent firm at a special low rate. Cohn argued that this tax relief would benefit the “biggest owners of equities in the world,” the “biggest public pension funds” – and, therefore, the beneficiaries of those pension funds, like public safety officers and teachers.

But, Rosenthal says this isn’t actually the case:

Now for some pension background: There are two basic forms of retirement plans—defined benefit (DB) plans which are typically thought of as traditional pensions and defined contribution (DC) plans, which include 401(k) plans and IRAs.  Defined benefit plans pay annuities to retired workers but these payments are promised by employers and based on years of work and earnings – they do not depend on the returns on assets held by the plan or by the employer directly.  (However, the windfall from a reduced tax rate on accumulated offshore earnings might increase the likelihood that employers meet their promised retirement obligations to their employees). By contrast, the returns on assets held in DC plans and IRAs flow directly to the beneficiaries.

At one time, private and public employers mostly provided defined benefit plans, but now most DB plans are provided by public employers for public servants, like those police officers, fire fighters, and teachers.  ….

A retroactive tax cut for U.S. corporations goes solely to existing shareholders. The Tax Policy Center estimates that 76 percent of the benefits, including the benefits through retirement plans, of a retroactive cut in corporate taxes would go to people in the top fifth of the income distribution (those with annual incomes above $150,000) and 40 percent to the top 1 percent (above $725,000).

Cohn is correct when he says retirement plans would benefit from a lower tax rate applied to accumulated foreign earnings, since they hold a large share of stock in US corporations. But, the DB plans do not pass additional returns through to police officers, fire fighters, and teachers. Only DC plans pass additional returns through to beneficiaries.

Bottom line: this tax break could potentially help counties meet their retirement obligations. But, according to Rosenthal, our retired police officers, firefighters and teachers with traditional pensions shouldn’t start spending all their nest eggs quite yet.