What You Need to Know About Tax Reform

Nov. 2, 2017: House Ways & Means Committee unveiled the Chairman’s Mark of the “Tax Cuts and Jobs Act” (HR 1)

  • CLICK HERE for the JCT description of the Chairman’s Mark [released Nov. 6]
  • CLICK HERE for the JCT distributional analysis (by income group) [released Nov. 3]
  • CLICK HERE to read the full legislative text of the Tax Cuts and Jobs Act.
  • CLICK HERE to read the section-by-section summary of the Tax Cuts and Jobs Act.
  • CLICK HERE for JCT revenue estimates (Chairman’s Substitute Amendment to be considered at Ways & Means Committee on Nov. 6)

Outlook:  Assuming no Democratic support, House GOP, with their 239-194 majority, can afford to lose only 22 votes; Senate GOP, with their slim 52-48 majority, can afford to lose only 2 votes (with the Vice president able to break a 50-50 tie.]

  • Democrats will oppose the bill because it is heavily skewed towards tax cuts for high-income taxpayers and there is little evidence that the proposed business or individual tax cuts will significantly increase economic growth or create jobs.
  • The bill could run into substantial procedural trouble in the Senate where the Byrd rule prohibits any revenue losses beyond the 10-year budget window, the effect of which is to require that tax cuts expire after 10 years unless fully paid for by that time.
  • The bill could run into substantial political trouble in both chambers because it repeals or caps a multitude of popular individual and business deductions and credits (see below) to pay for the reduction in tax rates.  Each economic sector will have to decide whether the rate reductions are worth the significant losses of current deductions and credits.
  • The distributional effects of the tax bill could also generate significant opposition to the bill.  By 2023, about 38 million households earning between $20,000 and $40,000 could end up paying higher taxes under the plan, compared to current law, according to testimony by the nonpartisan Joint Committee on Taxation.  In addition, by 2027, nearly one-third of the gross tax cuts would go to people earning over $1 million, and half would go to taxpayers earning over $200,000.
  • Bottom Line:  The bill as introduced is unlikely to pass; the question is whether the GOP will settle for slimmer 10-year tax cuts (and keep more deductions and credits in place) in order to claim a legislative achievement for 2017.  If the bill carries over into the 2018 election year, the chances of passage are more unlikely as political pressure from impacted interest groups becomes even more influential.

Fact Check:  Biggest tax cut in history?  No.  At a net 10-year cost of $1.4 trillion–i.e. tax cuts offset by tax increases–it is only the 7th or 8th largest according to the Tax Policy Center.

Summary of Key provisions follow [all revenue estimates cover 10 years, Fiscal Years 2018-27;  “cost” refers to revenue losses to the U.S. Treasury]:

New Rate Structure:   Under the structure, above the standard deduction of $24,000 for joint filers, there would be four tax rates:

  • 12% (on the first $45,000 of taxable income for individuals; $90,000 for married couples filing jointly)
  • 25% (starts at $45,000 for individuals; $90,000 for married couples)
  • 35% (starts at $200,000 for individuals; $260,000 for married couples)
  • 39.6% (starts at $500,000 for individuals; $1 million for married couples)
  • [Cost of the restructured brackets: $1.1 trillion]

 

TAX CUTS BENEFITING HIGH-INCOME HOUSEHOLDS:

  • Corporate rate reduction to 20%, the new 25% pass-through rate, and elimination of the corporate AMT would mostly benefit high-income households. (Cost: nearly $2 trillion – see business tax cuts below.)
  • Narrows the 39.6% bracket: would kick in at $500,000 for individuals (up from $426,700) and $1 million for joint filers (up from $470,000).
  • Repeals the Alternative Minimum Tax, which was designed to ensure that wealthy Americans cannot avoid a fair share of taxes [Cost: $695 billion]
  • Repeals Estate Tax (which currently impacts only estates worth more than $5.6 million for individuals or $11.2 million for couples) [Cost: $172 billion.]
  • Preferential Treatment of Long-Term Capital Gains and Qualified Dividends is retained.
  • Protects Investment Fund Managers by retaining their lower rate of tax (known as “carried interest”).

TAX CUTS BENEFITING LOW- AND MIDDLE-INCOME HOUSEHOLDS:

  • Standard Deduction Increased: from $6350 to $12,000 (individuals) and $24,000 (joint filers), however, personal exemptions are repealed.  [Raising standard deduction cuts taxes by $921 billion, but repealing personal exemption raises taxes by $1.5 trillion over 10 years.]  
  • Expands the Child Tax Credit from $1000 per child to $1600 (but refundable only up to $1000); and New $300 “Personal Credit” but only for 5 years.  [Cost: $430 billion]
  • Increase Phaseout Threshold of Child Credit.  [Cost: $209 billion]

REVENUE RAISERS TO PAY FOR INDIVIDUAL TAX CUTS

  • In general, most itemized deductions are repealed except mortgage interest, investment interest, charitable contributions, property taxes. [Tax Benefits Lost: $1.26 trillion].
  • Repeals deductions for interest on education loans, tuition, college expenses and other education incentives.  [Tax Benefits Lost: $47 billion] 
  • Limits capital gains tax exclusion on sales of primary residence to once every 5 years. [Tax Benefits Lost: $22 billion]
  • Consolidates/limits several higher education tax credits. [Tax Benefits Lost: $17 billion]
  • Eliminates deductions for Moving Expenses. [Tax Benefits Lost: $11 billion]
  • Eliminates deductions for Alimony Payments. [Tax Benefits Lost: $8 billion]
  • Eliminates exclusion for Care of Disabled.  [Tax Benefits Lost: $6 billion]
  • Eliminates credit for Adoption Assistance.  [Tax Benefits Lost: $4 billion]
  • Caps the Mortgage Interest Deduction for primary residence at $500,000 loans; and eliminates deduction for second homes.
  • Eliminates deduction for interest on home equity loans.
  • Eliminates deduction for State/Local Income & Sales Taxes, and Caps Property Tax Deductions at $10,000/yr.
  • Eliminates deductions for Medical Expenses.

BUSINESS TAX CUTS:

  • Corporate Income Tax Rate Cut from 35% to 20% except for personal services firms which would pay 25%. [Cost: $1.46 trillion]
  • Establish a new 25% Rate for Pass-Through Business Income earned by closely held businesses such as partnerships, limited liability companies and subchapter S corporations, except for personal services firms such as lawyers, physicians, and accountants. [Cost: $448 billion over 10 years]
  • Repeal Corporate Alternative Minimum Tax [Cost: $40 billion]
  • Full and Immediate Expensing of capital expenditures during the next 5 years. [Cost: $25 billion]
  • Sec. 179 expensing limits on business equipment purchases expanded from $500,000 to $5 million. [Cost: $11 billion]

REVENUE RAISERS TO PAY FOR BUSINESS TAX CUTS:

  • Cap the deduction corporations take for interest expenses although real estate developers and some others would be exempt [Raises $172 billion]
  • Caps Net Operating Loss deductions (NOLs) at 90 percent of taxable income. [Raises $156 billion]
  • Repeals sec. 199 domestic manufacturing deduction would be repealed. [Raises $95 billion]
  • Terminates private activity bonds and advance refunding bonds[Raises $56 billion]
  • Repeals credit for clinical testing expenses for drugs to treat rare diseases. [Raises $54 billion]
  • Repeals various tax preferences for the insurance industry. [Raises $40 billion]
  • Repeal “Like-kind” exchanges except for real property [Raises $30 billion]
  • Repeals business entertainment expense deductions but the current 50 percent deduction on business meals would be retained. [Raises $21 billion.]
  • Nonqualified deferred compensation. [Raises $16 billion]
  • Repeals deduction for FDIC premiums paid by large financial institutions. [Raises $14 billion]
  • Modify credit for electricity produced from renewable resources.  [Raises $12 billion]
  • Repeals deduction for employee fringe benefits, such as transit and parking. [Raises $11 billion]
  • Modification of limitation on excessive employee remuneration. [Raises $9 billion]
  • Repeals New Markets Tax Credit for investing in community development projects in low-income areas. [Raises $2 billion.]

INTERNATIONAL TAXES:

  • Territorial Tax Regime:  Move to “territorial” tax system with deduction for foreign-source portion of dividends received by domestic corporations from 10%-owned foreign corporations. [Cost: $205 billion]
  • Deemed Repatriation:  US-based multinational corporations would pay a 12 percent tax on past unrepatriated profits held in cash (5 percent for non-cash assets. [Raises $223 billion]
  • Excise Tax on Payments to Related Foreign Corporations.  [Raises $154 billion]
  • Current year inclusion by U.S. shareholders with foreign high returns. [Raises $77 billion]
  • Limit deduction of interest by domestic corporations which are members of an international financial reporting group. [Raises $34 billion]
  • Makes Permanent the “Look Through Rule” which enables a U.S. parent to avoid triggering tax on passive income distributed between foreign subsidiaries. [Cost: $12 billion]

CHURCHES, UNIVERSITIES, AND NON-PROFITS:

  • Excise tax based on investment income of private colleges and universities [Raises $3 billion]
  • Imposes a new 20% excise tax on “excess executive compensation” at non-profits. [Raises $3.6 billion]
  • Allows political campaign activity by churches despite their tax exemption. [Cost: $2.1 billion]