Economic Impact of Harvey and Tax Reform
Hurricane Harvey had a devastating catastrophic and life threatening impact across the Gulf and as the region prepares to clean up, analysts are worried that the economic effect could be devastating. The Texas Gulf Coast oil and gas industries are likely to see the first wave of problems. It is estimated that the region accounts for nearly a third of the nation's refinery capability. Given that many refineries had to close ahead of the storm, Americans could see gas prices spike by between 5-15 cents a gallon, especially in the South, Southeast and mid-Atlantic. Prior to the storm, the region enjoyed some of the lowest prices at the pump, ranging from about $2.10 to $2.21 per gallon, versus the national average of $2.36, according to AAA. Although the increase could be dramatic, it is likely to be brief.
The shuttering of the energy sector could also hurt the Texas economy over a longer term. After Hurricane Katrina in 2005, some refineries were closed for months, though that was the exception, not the rule. For tens of thousands of homeowners, the process of rebuilding will be longer lasting hurdle. According to estimates from CoreLogic, the cost to rebuild could be as much as $40 billion, with more than half of the activity centered in the densely-populated Houston metropolitan area. And like Superstorm Sandy and Hurricane Katrina, most homes those people do not carry flood insurance. Only 15 percent of homes in Harris Country, which includes Houston, have flood insurance, according to figures from the National Flood Insurance Program. Twenty percent of homes in Nueces County, where the coastal city of Corpus Christie is located, are covered. Those who don’t have insurance are going to need federal assistance in some form in order to rebuild.
Prior to Harvey, Katrina was the most catastrophic natural disaster in US history, costing a total of over $108 billion, most of which was funded by the Federal government. Those numbers will be in sharp focus, as the Trump administration starts what is likely to be a long process to address the nation’s clunky tax system.
“We are completely engaged in tax reform,” according to Gary Cohn, Chief Economic Advisor to President Trump. In an interview last week with the Financial Times, Cohn laid out some broad goals of reform, which were similar to the one-page statement of principles the White House released in April, though with a few extra details.
“On the personal side, we have protected the three big deductions — charitable, mortgage and retirement saving. We want to raise the standard deduction caps [currently $6,350 for single taxpayers and $12,700 for married taxpayers filing joint returns] and get rid of many of the other personal deductions. We want to get rid of death taxes and estate taxes [this tax applies only if assets given to heirs total more than $5.49 million, which according to estimates from the Tax Policy Center, means that there will be about 11,300 estate tax returns filed, of which 5,500 will be taxable].” To make up some of that lost revenue, the plan is to eliminate state and local tax deductions, which is bad news for taxpayers in high tax states like CA and NY, and other itemized deductions.
On the business side, the plan is to eliminate many of the deductions that companies can take and then lower rates from the current 35 percent (the President had targeted 15 percent earlier in the year, but that low level may be difficult to achieve). For those companies who stockpile cash outside of the US (Hi Apple!), Cohn says the administration will attempt to impose a one-time low tax rate (10 percent has been floated), “which will bring lots of money back home to the US.”
Just like the president and Treasury Secretary Mnuchin before him, Cohn reiterated that the changes in the tax code may cause a drop in revenue in the medium term, “When we grow the economy we will see substantial growth in revenue,” an assumption that even most conservative economists don’t think can work. The independent, nonpartisan Tax Policy Center estimated last month that previous cuts Trump has proposed — including slashing the corporate tax rate from 35 to 15 percent, getting rid of the estate tax, and cutting the top rate for individuals from 39.6 percent to 35 percent — would cost as much as $7.8 trillion over 10 years. The analysis also found that taxpayers earning between $149,400 and $307,900 would be the biggest losers under the plan—they would see an average increase of $3,000 to $4,000 a year in their taxes as a result of tax reform.