After much secrecy and delays, House Republicans unveiled last week the Tax Cuts and Jobs Act. The House opted for a more traditional legislative title for the bill instead of calling it the Cut, Cut, Cut Act as President Trump had proposed. This is smart as most of the proposed cuts are directed at corporations. House Ways and Means Chairman Kevin Brady (R-TX) and Speaker Paul Ryan (R-WI) aim to fast track and send the bill to the Senate by Thanksgiving. With the passage of the recent budget bill, the Tax Cuts and Jobs Act will only require a majority vote in the Senate to pass and Leader Mitch McConnell (R-KY) has said previously that he wants to pass a tax overhaul by year’s end. With a 52-seat majority Republicans can only afford to lose two GOP senators. Like the failed attempt to repeal the Affordable Care Act, this will be difficult.
- Lowers the corporate tax rate to a flat 20%
- Reduces tax on pass-through income to 25% for certain small businesses
- Allows full (100%) depreciation of capital expenditures in Year One
- Imposes a 1.4 percent excise tax on college endowments at 200 private universities
- Maintains the Low-Income Housing Tax Credit but eliminates tax-exempt private-activity bonds used to help fund airports, affordable housing developments and hospitals
- Reduce the number of income tax brackets to four
- Make no changes to 401k programs
- Cap the mortgage interest deduction at $500,000 (down from $1.1 million)
- Doubles the standard individual tax deduction
- Eliminate the state and local tax deduction as well as deductions educators use to buy school supplies
- Repeals the Alternative Minimum Tax
- Phases out the estate tax which currently affects estates of $5.5 million or more
- Eliminates deductions for medical expenses and student loan interest and the adoption tax credit
The last major tax reform took place in 1986 under President Reagan and had bipartisan support. Reagan initially called for tax reform to pass in time for the 1984 elections. That timeline wasn’t even close to being realistic. After Reagan won 49 states that fall, he had more political capital to leverage. Despite that, House and Senate leaders adhered to regular order knowing that real reform is only possible when there’s true bipartisan support. Fast forward to today and Rep. Richard Neal (D-MA), the Ranking Member on the House Committee on Ways and Means and the Dean of the Massachusetts Delegation, is urging Republicans not to rush legislation with such wide-ranging economic impacts. In a letter Rep. Neal sent last week to Chairman Brady, he noted that during the 1986 tax reform debate, Ways and Means held 30 hearings. Subcommittees held 12 hearings. More than 450 witnesses testified. The Committee took 26 days to mark up the bill. The Senate Finance Committee took a similarly thorough approach.
Now that stakeholders have had a chance to review the bill, many are concerned, especially those in Blue states. The tax on college endowments, for example, disproportionately targets large private universities in the Northeast. The same states also have costly housing markets and homeowners will take a hit with cuts to their mortgage interest deductions as well by the elimination of state and local tax deductions. It also appears that deficit hawks are looking away as the bill could add $1.5 trillion in debt over a decade unless unrealistic assumptions on economic growth come to fruition.
The Tax Cuts and Jobs Act will dominate all Congressional activity for the near future. It’s critical to quickly engage with lawmakers to make sure they realize this bill’s effects on your personal or corporate wallet. Not to get lost in the tax debate is the Dec. 8 deadline for Congress to pass legislation funding the government.