House Republicans on November 2 unveiled their much-anticipated tax reform legislation, the Tax Cuts and Jobs Act (HR 1). The 429-page bill represents the House Ways and Means Committee’s first legislative offer to significantly overhaul the U.S. Tax Code.
The bill loosely follows the unified framework released by the House, Senate and Trump Administration in September. House Ways and Means Chairman Kevin Brady, R-Tex., who has spearheaded tax reform efforts among House Republicans, said on November 2 after meeting with Trump at the White House that the president is “all in.” Brady told reporters at the White House, “The president is here today leading on tax reform…you are seeing with singular purpose a unified effort to break the status quo, to drain the swamp of this tax code and to change it for the better for the American people.”
During the November 2 meeting with House Republicans at the White House, Trump said he wants to see a bill on his desk by Thanksgiving. In a statement released by the president on the same day, Trump applauded the Ways and Means Committee for introducing the bill, calling it an important step toward providing tax relief for Americans. “My tax reform priorities have been the same since day one: bringing tax cuts for hardworking, middle-income Americans; eliminating unfair loopholes and deductions; and slashing business taxes so employers can create jobs, raise wages, and dominate their competition around the world.”
On the individual side of the tax code, the Tax Cuts and Jobs Act proposes to do the following (beginning in 2018):
- – Lower the individual tax rates for low-to-middle income taxpayers to 12, 25, and 35 percent. For joint returns, the 12 percent bracket would be $24,000 to $90,000, the 25 percent would start at $90,000; and at $260,000 for the 35 percent bracket (half for single, individual filers). The bill would maintain the current 39.6 percent tax rate for joint filers with taxable income of more than $1 million ($500,000 for individuals);
- – Increase the standard deduction from $6,350 to $12,200 for individuals and $12,700 to $24,400 for married couples;
- – Aim to simplify the tax code and filing process by eliminating “special-interest deductions;”
- – Establish a new Family Credit, which includes expanding the Child Tax Credit from $1,000 to $1,600, and providing a credit of $300 for each parent and non-child dependent to help all families;
- – Eliminate personal exemptions;
- – Preserve the Earned Income Tax Credit;
- – Continue the deduction for charitable contributions for those who itemize. As a revenue raiser, the bill imposes a 14$ tax on university endowments at schools with assets over $100,000 per student;
- – Grandfather in the home mortgage interest deduction for existing mortgages up to the current $1 million debt limit but lower the limit going forward for the home mortgage interest deduction on newly purchased homes up to $500,000;
- – Continue to allow itemized state and local property taxes deduction but only up to $10,000;
- – Eliminates the current itemized deduction for state and local taxes;
- – Retain popular retirement savings options such as 401(k)s and Individual Retirement Accounts as they are currently structured;
- – Repeals the alternative minimum tax (AMT); and
- – Retains the gift tax, doubles the estate tax exclusion, with full estate tax repeal after six years.
On the business side of tax reform, the Tax Cuts and Jobs Act would, among other things, includes proposals to:
- – Cut the corporate tax rate to 20 percent;
- – Create a top pass-through rate of 25 percent on small business income with safeguards against abuse;
- – Create a temporary 100 percent expensing write-off for qualified business property (fixed assets);
- – Allow for the cash method of accounting for businesses with up to $25 million in revenue;
- – Repeals Percentage of Completion and Uniform Inventory Capitalization (Unicap) rules for businesses with up to $25 million in revenue;
- – Make numerous changes to the taxation of foreign income and foreign persons/ businesses eliminating the worldwide tax regime;
- – Cap the deduction for net interest expenses at 30 percent of adjusted taxable income, except for small businesses with under $25 million in revenue;
- – Modify the net operating loss deduction 90% of taxable income of the carryback / carryforward year; and
- – Allow for the temporary repatriation of foreign earnings at a 12 percent rate (5 percent for noncash holdings).
- – Retain the research and development tax credit
House Republicans have not yet reached consensus on the proposals within the bill, and GOP House leaders can only afford to lose 22 votes on the measure if the bill receives no Democratic support. Much of the immediate backlash within the Party centers on the elimination of the State and Local Tax (SALT) deduction in its current form, while capping the current property tax deduction at $10,000.
Rep. Lee Zeldin, R-N.Y, issued a statement on November 2 saying that he would vote no on the bill in its current form. “We need to fix this State and Local Tax deduction issue,” Zeldin said. “Adding back in the property tax deduction up to $10,000 is progress, but not enough progress,” he added.
Several House and Senate Democrats have also been outspoken against the bill since its release. House Ways and Means ranking member Richard Neal, D-Mass., criticized the bill in a November 2 statement for largely benefiting the wealthy. “A rushed, partisan and secret process yielded over 400 pages of broken promises to middle-class families. This bill falls short of reform, falls short of middle-class tax relief and falls short of the fiscal principles to which Republicans have long held themselves,” Neal said.
Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., too, criticized the House GOP bill. “The overwhelming winners of this Republican tax bill are the people who already have the most power, who can already afford the best advice, and who are already thriving in an economy that’s leaving too many Americans behind,” Wyden said.
The House Ways and Means Committee has scheduled a markup of the Tax Cuts and Jobs Act to begin on November 6 at 12 PM. The markup is likely to last more than one day, and amendments to the bill are expected. A Congressional Budget Office (CBO) score of the legislation is forthcoming but had not yet been released.
Across the U.S. Capitol, the Senate Finance Committee is reportedly still planning to unveil its own tax reform bill on November 8. SFC Chairman Orrin G. Hatch, R-Utah, commended Brady and the House’s tax bill in a November 2 statement, while noting the Senate Finance Committee intends to move forward on its own measure. “While I will study this legislation carefully, I am working with my Senate colleagues to finalize the policy details of the Senate’s tax reform proposal to produce a mark for consideration in the Finance Committee once the House Ways & Means Committee completes its work, hopefully toward the end of next week,” Hatch said.
Much haggling remains, and not everything in the proposed act may make it into law. Most of the provisions apply to 2018. Thus 2017 would be a year to do all things possible to accelerate deductions and push income into potentially lower tax brackets. While it is impossible to predict the potential likelihood of meaningful tax reform, the only possibility of reform will be through the current reconciliation process (which only requires 50 votes in the Senate), as Democrats appear united against the reform agenda.
Bill Collier, CPA