After making it almost an entire calendar year without signing any major legislation, the Trump administration and the Republican Congress finally had their first major victory: successfully passing the Tax Cuts and Jobs Act into law. As the bill takes effect starting this year, it will continue to drag nothing but controversy in its wake, a windfall to the wealthy financed by the working and middle class. Progressive pundits got it right from the start: this bill almost surgically targets the demographics and regions most likely to support Democrats. You can see it in the cap on state and local tax deductions, which will brutalize homeowners in high-tax, coastal blue states like California and NY. The tax bill goes after university endowments, attacking the funding of those “liberal bastions.” And while Obamacare’s individual mandate overwhelmingly benefits red states, the tax bill repeals it in a transparent attempt at an ideological victory.
Less in the press, unfortunately, is how another area of both political and civic life — arts, culture and entertainment — will suffer the unforgiving brunt of this bill. From art collectors to starving, lowly actors, the bad-for-everyone bill has massive implications for the arts world. Well, except for the wealthiest among us.
The first new weapon in the fusillade is the elimination of miscellaneous deductions that exceed 2% of adjusted gross income. Previously, a taxpayer could opt to individually itemize expenses, deducting them one by one. This elimination is likely an attempt to simplify IRS filings by incentivizing taxpayers to opt for the standard deduction, which is now doubled in the new bill. While this could work for most professions, performers, for example, disproportionately benefit from itemizing because deductions were allowed for unreimbursed business expenses that are unique to their industry: audition travel, acting lessons, union dues, agent and manager fees, headshots, reels, websites, supplies. Many performers — that is, those who are categorized as employees — incur such expenses each year, and their total often far exceeds the standard deduction. Kiss that goodbye.
Does that mean unreimbursed business expenses could still be deducted by performers who are not classified as employees? Yes, it does. However, the two alternatives to filing as an employee are deviously double-edged. Performers can file their taxes as independent contractors, who can then continue to itemize and deduct under the new bill. But most film, TV and video-game production companies only hire performers as employees — most likely to avoid tax liability for independent contractors who might flake on their taxes. Perhaps more crucially, performers have fought for decades to be classified as “employees,” rather than “independent contractors,” because only “employees” can unionize. The Republican tax bill presents a Sophie’s Choice: retain the right to itemize and deduct as independent contractors and one day, perhaps, find employee rights fought for and won by such unions as SAG-AFTRA and Actors Equity nullified, or keep those rights and lose their deductions.
Another option is for performers to incorporate themselves as a “pass through” entity, such as an LLC or S-Corp. What does that mean? Basically, artists can form their own corporate body, making themselves employees of their own corporation, and “loan out” their services to a production company. This allows performers to enjoy a substantially lower tax rate and to keep deducting unreimbursed business expenses. The catch is that a “pass-through” can be very expensive to maintain, sometimes resulting in thousands of dollars in attorney and accountant fees each year. And again, as with independent contractors, many production companies will not hire performers as loan-outs unless they are major stars. So, forming a pass-through makes sense if you’re on the A-List; it’s a great way for wealthy performers with professional handlers to skirt some tax liability. But incorporation may very well be out of reach for everyday artists.
Who are the big winners in the performing arts world with this tax bill? Why, large media companies and movie studios, of course, whose corporate tax rate is now slashed from 35% to 21%. Many of these entities were among the fiercest lobbyists for a reduced corporate tax rate: unlike their tech industry brethren, most of their money isn’t sheltered overseas. The Motion Picture Association for America estimates that its member companies will save over $5 billion under the new tax bill. Hooray for Hollywood?
In the world of the fine arts, things don’t fare much better, as galleries and masterpiece collectors must now adapt to the repeal of portions of Section 1031 of the tax code. Section 1031 covers “like kind exchanges,” which previously allowed for the forestalling of paying taxes on gains made by the selling of art if such gains were then used to buy other pieces of art, of equal or greater value. This may potentially result in art collectors holding onto their art collections indefinitely, since they can no longer financially benefit as they used to through selling works. (Side note: the tax bill still allows 1031 exchanges for other investment properties, such as real estate, which will surely benefit such Republican real estate moguls as who and who else?)
For artists, collectors and cultural institutions, could this loss of a tax shelter result in any societal benefit, like an increase in the giving of art to museums or other nonprofit charities? This is something desperately needed and, fortunately, the one major itemized deduction that the tax bill does keep is for charitable donations. But there are several reasons why such a development is, in fact, unlikely. First, to reiterate, the new tax bill disincentives itemized deductions: certain patrons would have to forego more lucrative deductions in order to benefit from their donations. The tax bill also doubles the estate tax exemption to $11 million for individuals and $22 million for couples. This higher threshold will likely encourage some owners of fine art to simply keep their work inside of their estate and pass it on to their heirs, as they no longer have to fear triggering additional taxes by maintaining possession.
According to the nonprofit Council on Foundations, it is estimated that the tax bill will lower charitable giving in the US by $16 to $24 billion a year. Now, we all know that at least one person’s “charity” is a total sham, so perhaps that’s not as bad as it sounds. However, look at the alternative: by eliminating tax incentives to sell and to buy art, and by eliminating tax incentives to donate it, the bill only encourages collectors to sit on what they have. With the exception of the wealthiest collectors, this can’t be a net-plus for the art market, either.
All of the above is bad enough for the world of arts, culture and entertainment, which is why most industry groups routinely denounced the bill before it passed. It’s worth nothing, however, just how viscerally vicious the Republicans wanted to be towards artists and the creative professions as the Congressional legislative process, such as it was, began. Earlier drafts of the tax bill attempted to discard the “qualified performing artist” deduction for low-income entertainment industry workers. There was an amendment aiming to eliminate low-income housing credit exemptions that are to lure artists into new cities through affordable housing. There was an attempt to treat tuition wavers as taxable income, something that would have disproportionately affected artists who enroll in MFA programs. While none of these items made it in the final version of the tax bill, it demonstrates frothing Republican hostility to anyone in any creative profession anywhere in America.
This tax bill will have tremendously negative ramifications across the arts world. There exists little evidence to suggest that Republicans didn’t plan it this way. While Republican disdain for people in creative professions remains indisputable, what’s worse is how it will leave better options available for the wealthiest in this sector. We shouldn’t be surprised: the Republican attitude is the same, regardless of industry. They herald this bill as a boon for the middle class, but we know it isn’t. Welcome instead to the new Gilded Age.
