tax

WASHINGTON — Treasury Secretary James A. Baker III faced open hostility to the Reagan Administration’s tax revision proposal Tuesday as the Senate Finance Committee began what is expected to be at least three months of testimony on overhauling the current tax code.

“The best simplification this committee could do for the country would be just to adjourn,” Sen. Steven D. Symms (R-Ida.) complained.

Senate Republican leader Bob Dole of Kansas, a committee member, conceded that progress on tax revision could be slow. “Once the initial glow has faded,” Dole said, “there are a lot of questions this committee has to deal with.”

Warning of ‘Fiscal Disaster’

Meanwhile, Martin S. Feldstein, former chairman of President Reagan’s Council of Economic Advisers, warned that the Administration’s tax proposal could be a “fiscal disaster if tax reform became a deficit-enlarging tax cut.”

Feldstein, who left the White House last year after several disputes over Administration policy toward budget deficits, told the House Ways and Means Committee that the tax proposal “is at best revenue neutral and has a substantial risk of losing revenue.”

Other economists testifying before the House panel, which originates tax legislation, also expressed skepticism over the Administration’s contention that the tax plan would raise as much revenue as the current tax system. They contended that the package could exacerbate deficits that are now expected to remain larger than $170 billion annually well into the next decade, even if the package of spending cuts now working its way through Congress becomes law.

“I suspect that the President’s proposal is a revenue loser, particularly after 1990,” said John H. Makin, director of fiscal studies at the American Enterprise Institute.

But Baker, in defending the tax proposal to the Senate panel, insisted that Reagan’s plan would lose only $11.5 billion during the next five years, substantially less than 1% of the $4.7 trillion that the government estimates it will collect in total revenues during that period.

Contradictory Attacks

In grilling Baker, senators on the tax panel attacked the White House proposal on a wide variety of sometimes contradictory points.

Sen. William V. Roth Jr. (R-Del.) complained that the proposal “tends to soak the middle class,” but he worried also that the plan would be too generous to consumers at the expense of those who save.

Some senators argued that the plan would do little to help businesses facing the threat of foreign competition, but others suggested that individuals should receive a more generous tax break even if it means increasing taxes for corporations.

Most members of the Republican-controlled committee warned that they would attempt to restore certain tax breaks that would be eliminated by the White House package.

In particular, they criticized Reagan’s proposals to abolish the deductions for state and local taxes and for two-earner couples, to eliminate the investment tax credit and alternative energy tax credits and to tax growth in the cash value of insurance policies. But Sen. Bill Bradley (D-N. J.), author of a separate tax revision proposal, argued that the White House tax plan does not go far enough in eliminating special tax preferences. He told Baker that he would try to eliminate some tax breaks for the oil industry and wealthy investors.

Exemption Hike Opposed

Sen. George J. Mitchell (D-Me.) challenged Baker’s contention that the best way to help families living below the poverty line to escape income taxes is to increase the personal exemption from the current $1,040 to $2,000 next year.

Mitchell said that he would introduce a proposal to limit the increase in the personal exemption and grant a larger increase than Reagan recommended in the standard deduction, or zero-bracket amount, a proposal that would help only taxpayers who do not itemize their deductions. Mitchell said that his approach would concentrate tax relief more directly on middle-income and lower-income families than would the Administration’s plan.

Baker vigorously defended the Administration’s plan against the attacks. “We think our plan is very fair,” he said, pointing out that the majority of taxpayers at every income level would receive tax reductions and that the average tax cut would be 7%.

JEFFERSON CITY, Mo. — To tax tips or not? That is a question that will confront lawmakers in states across the U.S. as they convene for work next year.

The Trump administration is urging states to follow its lead by enacting a slew of new tax breaks for individuals and businesses, including deductions for tips and overtime wages, automobile loans and business equipment.

In some states, the new federal tax breaks will automatically apply to state income taxes unless legislatures opt out. But in many other states, where tax laws are written differently, the new tax breaks won’t appear on state tax forms unless legislatures opt in.

In states that don’t conform to the federal tax changes, workers who receive tips or overtime, for example, will pay no federal tax on those earnings but could still owe state taxes on them.

States that adopt all of Trump’s tax cuts could provide hundreds of millions of dollars in annual savings to certain residents and businesses. But that could financially strain states, which are being hit with higher costs because of new Medicaid and SNAP food aid requirements that also are included in the GOP’s big bill that Trump signed this summer.

Most states begin their annual legislative sessions in January. To retroactively change tax breaks for 2025, lawmakers would need to act quickly so tax forms could be updated before people begin filing. States also could apply the changes to their 2026 taxes, a decision requiring less haste.

So far, only a few states have taken votes on whether to adopt the tax breaks.

“States in general are approaching this skeptically,” said Carl Davis, research director at the nonprofit Institute on Taxation and Economic Policy.

Treasury presses states to act

The bill Trump signed July 4 contains about $4.5 trillion of federal tax cuts over 10 years.

It creates temporary tax deductions for tips, overtime and loan interest on new vehicles assembled in the U.S. It boosts a tax deduction for older adults. And it temporarily raises the cap on state and local tax deductions from $10,000 to $40,000, among other things. The law also provides numerous tax breaks to businesses, including the ability to immediately write off 100% of the cost of equipment and research.

Forty-one states levy individual income taxes on wages and salaries. Forty-four states charge corporate income taxes.

Treasury Secretary Scott Bessent this month called on those states “to immediately conform” to the federal tax cuts and accused some Democratic-led states that haven’t done so of engaging in “political obstructionism.” Though Bessent didn’t mention it, many Republican-led states also have not decided whether to implement the tax deductions.

“By denying their residents access to these important tax cuts, these governors and legislators are forcing hardworking Americans to shoulder higher state tax burdens, robbing them of the relief they deserve and exacerbating the financial squeeze on low- and middle-income households,” Bessent said.

Some tax analysts contend that there’s more for states to consider. The tax break on tips, for example, could apply to nearly 70 occupational fields under a proposed rule from the Internal Revenue Service. But that would still exclude numerous low-wage workers, said Jared Walczak, vice president of state projects at the nonprofit Tax Foundation.

“Lawmakers need to consider whether these are worth the cost,” Walczak said.

Tips and overtime tax breaks

Because of the way state tax laws are written, the federal tax breaks for tips and overtime wages would have carried over to just seven states: Colorado, Idaho, Iowa, Montana, North Dakota, Oregon and South Carolina. But Colorado opted out of the state tax break for overtime shortly before the federal law was enacted.

Michigan this fall became the first — and so far only — state to opt into the tax breaks for tips and overtime wages, effective in 2026. The overtime tax exemption is projected to cost the state nearly $113 million and the tips tax break about $45 million during its current budget year, according to the state treasury department.

Michigan lawmakers offset that by decoupling from five federal corporate tax changes the state’s treasury estimated would have reduced state tax revenues by $540 million this budget year.

Republican state Rep. Ann Bollin, chair of the Michigan House Appropriations Committee, said the state could not afford to embrace all the tax cuts while still investing in better roads, public safety and education.

“The best path forward is to have more money in people’s pockets and have less regulation — and this kind of moved in that direction,” she said.

Arizona could be among the next states to act. Democratic Gov. Katie Hobbs has called upon lawmakers to adopt the tax breaks for tips, overtime, seniors and vehicle loans, and follow the federal government by also increasing the state’s standard deduction for individual income taxpayers. Republican state House leaders said they stand ready to pass the tax cuts when their session begins Jan. 12.

Corporate tax breaks

In addition to Michigan, lawmakers in Delaware, Illinois, Pennsylvania and Rhode Island have passed measures to block some or all of the corporate tax cuts from taking effect in their states.

A new Illinois law decoupling from a portion of the corporate tax changes could save the state nearly $250 million, said Democratic state Sen. Elgie Sims, chair of the Senate Appropriations Committee. He said that could help ensure continued funding for schools, healthcare and other vital services.

Illinois Gov. JB Pritzker, an outspoken Democratic opponent of Trump, also cited budget concerns for rejecting the corporate tax cut provision. He said states already stand to lose money because of other provisions in Trump’s big bill, such as a requirement to cover more of the costs of running the Supplemental Nutrition Assistance Program, known as SNAP.

“The decoupling is an effort to try to hold back the onslaught from the federal government to make sure that we can support programs like the one we’re announcing today,” Pritzker told reporters at a December event publicizing a grant to address homelessness in central Illinois.

Lieb writes for the Associated Press. AP writer John O’Connor in Springfield, Ill., contributed to this report.

A proposed tax increase in one European country has sparked concern

Ryanair has blasted moves that could see passengers pay higher bills under moves to increase airport departure taxes in one popular European destination by as much as double the current rate. In Belgium, the current federal tax stands at five euros per passenger and will be increased to 10 euros per passenger from 2027, which may see costs pushed onto passengers.

On top of this, Charleroi Airport in Belgium will reportedly make passengers spend three euros on their flights, according to proposals made by the Charleroi City Council. Some European publications have speculated this will push competition onto cheaper flights in neighbouring airports such as Paris-Beauvais and Lille Airport.

Ryanair are furious. In response to the proposed tax change, the airline has already confirmed this week that it will cut one million seats from its Brussels Winter 2026/27 schedule.

Ryanair said this move will also affect 20 routes on the schedule while arguing that the move is in direct opposition to other EU markets such as Slovakia, Sweden, Italy, and Hungary, where it claims such taxes are being cut down to drive up tourism. Because of this, Ryanair is calling on both the Belgian Prime Minister De Wever and the Mayor of Charleroi, Thomas Dermine, to reverse the proposed plans.

Ryanair’s Jason McGuinness said: “The De Wever Govt has bizarrely decided to further increase Belgium’s already sky-high aviation tax by another +100% from Jan 2027, on top of the +150% in July last. These repeated increases to this harmful aviation tax make Belgium completely uncompetitive compared to the many other EU countries, like Sweden, Hungary, Italy, and Slovakia, where Govts are abolishing aviation taxes to drive traffic, tourism, and jobs.

“As a result of this second tax hike in just 5 months, Ryanair has been forced to cut -22% of its Brussels traffic (-1m seats), -5 aircraft from our Charleroi base (loss of US$500m investment), and 20 routes (13 from Charleroi & 7 from Zaventem) for Winter 26/27. Should the Charleroi city council proceed with its ill-judged proposal to introduce further taxes on passengers departing from Charleroi next year, these cuts will deepen as Ryanair will be forced to reduce flights, routes and based aircraft at Charleroi from as early as April 2026 with thousands of local jobs at risk.

“If Prime Minister De Wever and his Govt really wanted to revive Belgium’s economy, they should abolish this harmful aviation tax, not double it. Despite so many other EU countries taking this step to support their economies, Belgium is going in the opposite direction, driving up access costs and pushing airlines and tourism elsewhere.

“We urge Prime Minister De Wever to scrap this damaging aviation tax before Belgian’s traffic, tourism, jobs, and the wider economy collapse any further. Furthermore, the Charleroi city council needs to abandon its lunatic plans to increase taxes driving job losses with the effect of lowering payroll, VAT and corporate tax receipts for the local economy.”

Belgium receives more than 18 million tourists each year. According to the latest data from the British government, around 1.3 million Brits travel to Belgium each year.

The proposed doubling is reportedly designed to help finance airport infrastructure and meet new environmental requirements, according to Air Journal.

A San Francisco supervisor has proposed increasing the city’s film and television tax credit to lure more productions to the Bay Area.

Board President Rafael Mandelman introduced legislation Tuesday that would create a tiered rebate system based on local spending on items like San Francisco resident wages, services or goods.

To qualify, most productions must spend a minimum of $500,000 in the city and shoot at least five days of principal photography there. Those productions also get a 100% rebate on city agency fees, including permits and police services.

Then, under the new proposal, those projects could get 10% back on the first million dollars spent in San Francisco, then 20% on any qualified local spending beyond that, said Manijeh Fata, executive director of the San Francisco Film Commission.

“As localities across the state compete to attract more film production, San Francisco must stay in the game,” Mandelman said in a statement. “Strengthening our film incentive program will keep jobs in San Francisco and help ensure this important economic activity doesn’t bypass us.”

The legislation is expected to go to a committee hearing next month, with a final vote potentially at the end of January or early February, Fata said.

Though San Francisco’s production incentive was established in 2006, the program has been “underutilized,” said Supervisor Connie Chan, who is co-sponsoring the legislation.

“I support this legislative update so we can ensure the original intent and benefits of the program can be fully materialized,” she said in a statement. “I expect the film rebate program to deliver robust job opportunities for workers, creative promotion of our City through films that will boost tourism and increase sales tax revenue with film industry spending.”

San Francisco’s incentive proposal comes five months after California increased the cap on the state’s film and television tax credit program in an attempt to curb runaway production to other states and countries.

California now allocates $750 million annually to the program, up from $330 million. Legislators also broadened the type of productions eligible to apply for the credit.

Since then, more than three dozen TV shows, including a “Baywatch” reboot, and 52 films have been awarded tax credits.

Sébastien Lecornu faces a vital test to his premiership over the social security budget bill.

France’s National Assembly is set to vote on a major social security budget bill, in a critical test for the embattled Prime Minister Sebastien Lecornu, who has pledged to deliver the country’s 2026 budget before the end of the year.

Debate on the legislation began on Tuesday afternoon. Lecornu governs without a majority in parliament, and has sought support from the Socialist Party by offering concessions, including suspending President Emmanuel Macron’s controversial pension reform.

If lawmakers reject the plan, France could face another political crisis and a funding gap estimated at 30 billion euros ($35bn) for its healthcare, pension, and welfare systems.

“This social security budget bill is not perfect, but it is the best possible,” Lecornu wrote on X on Saturday, warning that failure to pass it would threaten social services, public finances, and the role of parliament.

Socialist leader Olivier Faure said on Monday that his party could back the bill after the government agreed to suspend Macron’s 2023 pension reform, which raised the retirement age, until after the 2027 presidential election.

But the far-right National Rally and the hard-left France Unbowed have both signalled their opposition, along with more moderate right-wing parties.

Even government allies, including the centrist Horizons party and conservative Republicans, could abstain or vote against the legislation. They argue that freezing the pension reform and raising taxes to win socialist support undermines earlier commitments.

France, the eurozone’s second-largest economy, has been under pressure to reduce its large budget deficit. But political instability has slowed those efforts since Macron’s snap election last year resulted in a hung parliament.

Lecornu, a close Macron ally, said last week that rejection of the bill would nearly double the expected shortfall from 17 billion to 30 billion euros ($20bn-$35bn), threatening the entire 2026 public spending plan.

Without a deal before year-end, the government may be forced to introduce temporary funding measures.

The government aims to bring the deficit below 5 percent of GDP next year, but its narrow political options have led to repeated clashes over public spending.

Budget disputes have already toppled three governments since last year’s election, including that of former Prime Minister Michel Barnier, who lost a no-confidence vote over his own budget bill.