Federal Tax Plan = Meaningful Cuts More Than Comprehensive Reform

The “Tax Cuts and Jobs Act” (H.R. 1) has finally arrived! The long-awaited details – over 400 pages worth – are now out there for all to debate. This is a debate that will play out before the House Republican Ways and Means Committee this week. Much of the public discourse will focus on how it impacts individuals, but for the business community it is the taxation of businesses, large and small, that is of the most significance.

The plan includes a reduction of the corporate rate from 35% to 20%, an important and meaningful step. It also caps the taxation of income derived from pass-throughs (S corporations, LLCs, partnerships and sole proprietorships) at 25%. Key provisions are outlined below. And if you are truly into tax law, the full bill is also available, as is a section-by-section summary.

Now you may note that this legislation is labeled a tax cut, not tax reform. And while many will call it that, it is probably better characterized as a tax cut bill. Cuts are good, and these measures will certainly be the impetus for some level of economic growth. But the trillion dollar questions remain: How much will it spur in gross domestic product (GDP) growth? And, can that realistically be enough to offset the projected reductions in tax collections?

Nobody can really know the answers to these politically-charged questions. But as you read the “scoring” of this legislation (to be published by the Congressional Budget Office after passage out of the House Ways and Means Committee), you may consider these items for context: the GDP growth rate in the United States averaged 3.22% from 1947 until 2017; GDP has pleasantly surprised people by breaking the 3% mark the last couple quarters; and the GDP will probably need to go a good bit higher to prevent the bill from adding substantially to the already staggering federal deficit. So listen for what growth rates are assumed in the projections that will be discussed and debated – and draw your own conclusions.

Key provisions affecting businesses

  • Reduces the corporate tax rate: The rate will drop to 20% from the current 35% and is designed to be permanent.
  • Establishes a repatriation tax rate: The repatriation rate on overseas assets for U.S. companies would be as high as 12%. The bill also may include a mandatory repatriation of all foreign assets. Illiquid assets would be taxed at a lower rate, spread out over a longer period than liquid assets like cash.
  • Creates a 25% rate for pass-through businesses: Instead of getting taxed at an individual rate for business profits, people who own their own business would pay at the so-called pass-through rate. (There will be some guardrails on what kinds of businesses can claim this rate to avoid individuals abusing the lower tax.)

Key provisions affecting individuals

  • Creates new individual income brackets:
    • 12% for income up to $45,000 for individuals and $90,000 for a married couple
    • 25% up to $200,000 individual/$260,000 couples
    • 35% up to $500,000 individual/$1 million couples
    • 6% over $500,000 individual/$1million couples
  • Caps state and local property tax deduction at $10,000, but does NOT cap income or sales tax deductions.
  • Eliminates the estate tax: The threshold for the tax, which applies only to estates with greater than $5.6 million in assets during 2018, would double to over $10 million; the plan then phases out the tax after six years.
  • Does NOT change taxation of 401(k) plans.
  • Increases the child tax credit to $1,600 from $1,000. The bill would also add a credit of $300 for each non-child dependent or parent for five years, after which that provision would expire.
  • Limits home mortgage interest deduction: On new-home purchases, interest on loans up to $500,000 would be deductible. (The current limit is $1 million.)
  • Nearly doubles the standard deduction: To avoid raising taxes on those currently in the 10% tax bracket, the standard deduction for all taxes would increase to $12,000 for individuals (up from $6,350) and $24,000 for married couples (up from $12,700).
  • Eliminates most personal itemized deductions and many credits. The only deductions preserved explicitly in the plan are for charitable gifts and edited home-mortgage interest.
  • Repeals the alternative minimum tax (AMT). The tax, which forces people who qualify because of an outsized number of deductions, would be eliminated under the legislation.

Full policy highlights of the bill can be found here.

Keep in mind this is the House’s plan and it will be subject to a different form of scrutiny in the Senate. So regardless all the prior coordination among those working together on this effort for months, some (perhaps many) things will change – they always do!

As for the timeline, it’s hard to say. But we do know that the House Ways and Means Committee will begin hearing amendments this week, and the process could take several days. A vote on the bill by the full House, as it is passed out of Ways and Means, is anticipated to come as early as November 13. From there it goes to the Senate Finance Committee, then full Senate. Optimists hope for something to pass before the end of the year. However, don’t be surprised if the debate isn’t carried over into the beginning of 2018.

Indiana’s delegation members are also weighing in with their views on the new tax bill. Chief among them is Congresswoman Jackie Walorski (IN-02), a member of the pivotal House Ways and Means Committee: “Hoosiers deserve every opportunity to achieve success and live the American Dream, and that’s what tax reform is all about. The Tax Cuts and Jobs Act will help American businesses expand, invest and hire more workers, and it will let middle-class families keep more of the money they earn. It’s time to fix our broken tax code and level the playing field for hardworking Americans by once again making America the best place in the world to do business.”

Resource: Bill Waltz at (317) 264-6887 or email: bwaltz@indianachamber.com 

Charting the Tax Cut Choices

The top issue — maybe the only issue besides that little continuing resolution thing to keep the federal government in business financially — of the lame duck session of Congress appears to be what to do about the expiring Bush era tax cuts.

The choices:

  • Extend all the cuts indefinitely (the GOP favorite)
  • Limit the indefinite extensions to incomes below $250,000 with those above the mark seeing a significant tax hike (President Obama’s preference)
  • A temporary extension (one to three years) across the board (the reported fallback position for Republicans)
  • The combo option — extend middle-income cuts indefinitely but limit the upper-income cuts to only a few years. It’s called decoupling and is the suggested backup plan for the Democrats
  • Do nothing and go home

Let’s hope the message sent by the voters last week was received by those serving in Washington and the final option does not become part of the mix.

Of the other four, which is most likely? My best guess (and it’s only a guess) is that decoupling might become a frequently used term. Your thoughts? 

Congress Adjourns: ‘Let’s Do Our Job’ Doesn’t Happen Yet

It’s easy, actually very easy, to credit party politics for government dysfunction these days. So while Congress headed out of Washington this week (12:20 a.m. Thursday for the House) without dealing with the soon-to-expire Bush-era tax cuts, there was at least a little joy in some comments that accompanied the action.

In other words, some Democrats were downright upset that they didn’t stay and do their job (their words). In fact, Speaker Nancy Pelosi had to cast a tiebreaking vote to allow for adjournment after 39 members of her caucus wanted to vote on tax cut extensions.

Maybe there is some hope for the post-election session. Here are the words of a few Democrat representatives:

  • Rep. Gerry Connolly of Virginia:  “I think we should stay and deal with taxes. We should extend the tax cuts now. Before we adjourn. I get paid to be here. Let’s do our job.”
  • Rep. Bobby Bright, Alabama: “I’m not ready to adjourn if there’s any work they expect us to do. We’ve got a lot of work to do, a lot of unfinished business, and I’m ready to take it on. That’s my position. The vast majority of people in my district are saying ‘Don’t raise taxes when the economy is in such a bad state, on anybody.’ ”
  • Rep. Zack Space, Ohio: “That’s an issue we should be resolving before we go home. I think that small business, big business, individuals, have a right to expect some certainty. The longer we keep this open, the more uncertainty there is. Our economy is such that I don’t think we can afford that.”

For good measure, here are some sound thoughts from Democrat Senator Ben Nelson:

"In my view, raising anyone’s taxes, given our fragile economy would be a move in the wrong direction. Nebraskans I represent tell me they feel a lot of uncertainty about the future. Nebraska business owners do to. The possibility of tax increases is just one more reason that companies at home and across the country are holding on to cash and are hesitant to invest in new equipment, new production and new employees."

 Hopefully, such comments will lead to positive actions before it is too late.

We Better Keep Engaged in D.C. Doings

Here’s how expert journalists from CongressDaily (that means they’re in Washington every day reporting on what’s happening — or not happening) assess the return of Congress from its extended August recess:

The Senate is set to pass legislation as soon as this week to spur small-business hiring. Other measures might also move, but the final pre-election work session is expected to be mostly political theater, its goal more electoral than legislative. Republicans will look to hold a lead and avoid missteps while Democrats try to use control of the agenda to alter the game.

There is little chance both chambers before the election will pass a
package addressing the 2001 and 2003 tax cuts, which expire this year,
leadership aides in both parties said. That leaves the debate, for now, as important for both parties as the result.

Not very encouraging, is it? But that does not alter one bit our (that’s all of us) role — maybe better defined as responsibility — to try and make a difference.

A contingent of state business leaders will do so in Washington for two days this week during our annual D.C. Fly-in; and we’ll tackle the policies (and probably a little bit of the politics) during our monthly conference call for Chamber members on Friday.

The bottom line: One can find plenty to complain about in the laws and regulations emanating from our nation’s capital. But are you entitled to keep up the criticism if you don’t at least try to do something about it? Trying could mean different things for different people. Attend events like the Fly-in (we go every year), spend an hour learning more about the issues on Friday, write or make a phone call to your representatives, get involved politically if you don’t like the current leaders, etc.

The point: Get involved.