In Brief: Dry Levies, Chill Winds & Tense Times

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Levies are dry in U.S. states

The Internal Revenue Service is not happy that some U.S. governors are eager to make up for lower federal deductions under the recent tax reform by reclassifying certain state taxes as deductible.

The Tax Cuts and Jobs Act of 2017, passed last December, contains a provision that placed a new limit on taxpayer deductions of state and local taxes from their taxable income at the federal level. Led by New York, states are seeking to allow individuals to reclassify local property tax payments as charitable contributions, which can be deducted.

“New York was the first to take action to protect our residents from this hostile assault,” Gov. Andrew M. Cuomo told The New York Times. New Jersey and Connecticut are pursuing similar strategies.

On May 23, the IRS said it would not tolerate attempts by states to “circumvent the new statutory limitation on state and local tax deductions”. Taxpayers, it added, “should be mindful that federal law controls the proper characterization of payments for federal income tax purposes,” according to an IRS notice.

The Tax Policy Center at the Brookings Institution has issued a state-by-state guide to the effects of the federal tax reform, The Effect of The TCJA Individual Income Tax Provisions Across Income Groups and Across the States.

HFC reprieve gets cold reception

Politicians are trying to freeze out a type of refrigerant used in air conditioners that is thought to contribute to global warming. On May 14, a bipartisan group of senators introduced a bill to allow the Environmental Protection Agency to phase out hydrofluorocarbons, or HFCs, a family of gases also used in refrigerators.

The legislative moves follow a decision by a U.S. Court of Appeals that declared the EPA’s regulatory effort to prohibit HFCs illegal, ruling that the agency lacked the authority to implement the ban.

The EPA program was launched under congressional authority granted to the agency in 1990 in order to comply with the Montreal Protocol, an international treaty that phased out the use of ozone-depleting refrigerants. The court ruled that HFCs were linked to climate change, not the ozone layer, and thus not covered by the EPA’s authority.

Trade tension is the new normal

If you’re confused by the seemingly on-again, off-again nature of American tariffs on Chinese goods, get used to it. “The Sino-US relationship is entering a ‘new normal,” says Hu Yifan, chief China economist at UBS, the Swiss bank, in Hong Kong. “It will feature tension lasting for years, with cycles of fight-talk fight-talk, in our view.”

 The ups-and-downs continued in May with China and the U.S. releasing a joint statement on May 19, with an agreement to "substantially decrease the U.S. trade deficit in goods with China”. This was followed by Washington’s announcement on May 29 of a 25 per cent tariff on Chinese imports containing "industrially significant" technology.

In the long term, says analysts, agriculture and energy – especially oil and gas products will be the areas of focus if there is an effort to substantially reduce the bilateral trade imbalance.

More U.S. agricultural exports to China will increase competition for China’s farmers, who will need to lower costs and raise quality, UBS noted. However, higher U.S. oil and gas exports would create new business opportunities for companies such as China National Petroleum Corporation, which would need to build more storage capacity.

This might not be enough. “Even with a meaningful increase in U.S. agricultural and energy exports, we believe it will still be hard for the U.S. to substantially reduce trade deficits against China,” said Chen Xingdong, chief China economist at BNP Paribas Global Markets in Beijing.