Last week Congressional Republicans released an outline of their tax reform proposal for 2017. They hope to move the package on a fast track both in process and time. The process part is that they will try and use a new 2018 budget resolution and reconciliation tool to fast track the legislation through the Senate where only 50 votes would be needed under the budget reconciliation rules.
The time aspect of it is that the House hopes to pass a tax cut package or tax reform package by the end of this month. That would then leave the Senate the shortened month of November to act on their proposal. Presumably they could then negotiate differences in the remaining days of this year’s session and pass something in December.
That timetable would seem to be very ambitious even if it were only a tax cut package which it still may end up being. A comprehensive reform proposal will have its challenges as it eliminates various deductions and exemptions as well as controversies over how to set the tax rate and for which income brackets.
Another challenge will be, will it be paid for? If it is paid for, how does that happen? Will tax changes simply be expected to pay for themselves or will Congress also intend to cut programs outside of the defense budget? The broad outline released by Budget Committee Chair, Senator Mike Enzi (R-WY) will allow for up to $1.5 trillion in tax cuts. A number of blanks must be filled in but the current draft resolution would appear to contain budget language directing the Senate Interior Committee to find some savings, a provision that is an attempt to open the state of Alaska to more oil drilling. That is something supported by Senator Lisa Murkowski (R-AK).
The first steps in this process should take place this week when the Senate begins to act on a 2018 budget resolution and reconciliation instruction. Two weeks ago, Senate leaders led by Senator Bob Corker (R-TN) indicated that Republican leadership had come to an agreement on a budget resolution for 2018. The budget resolution released by Chairman Enzi appears to leave out budget reconciliation language to repeal the ACA.
Under the proposed agreement Congress would be able to provide a $1.5 trillion tax cut (over ten years). It would not necessarily have to be paid for. The budget resolution would provide for what is called dynamic scoring. Dynamic scoring would bypass the traditional CBO calculations that attempt to calculate the cost of a tax cut. Instead, dynamic scoring would calculate the amount of economic growth that would be projected because of a tax cut, and suggest that a tax cut would not increase deficits but would increase economic activity to such an extent that deficits would not occur.
On the House side, a budget resolution and reconciliation had been written in July but not voted on due to objections by House conservative Republicans. They didn’t feel it cut enough in entitlement spending and they wanted to see the outline of tax cuts. Early indications are they are satisfied with the tax outline released last week.
What’s in It
Generally, the proposal would eliminate most deductions for individuals and couples. Under the broad document, certain deductions for charitable giving and the mortgage interest deductions would stay. Most others would disappear. Perhaps most controversial is the elimination of taxpayer’s ability to deduct state and local taxes. A big deduction for many on the coasts and middle west where governments fund services through a state and local income tax. The Republican plan envisions that this would be offset by doubling the current standard deduction to $12,000 for single filers and $24,000 for couples. It would also lower tax brackets to 12 percent, 25 percent and 35 percent although it does not indicate at which income levels those brackets would hit—an issue that will be significant.
Deductions for dependent children would be eliminated but the document indicates that the child tax credit would be increased while the first $1000 would be refundable. It doesn’t indicate how much the credit would increase. The proposal also eliminates the inheritance tax, which its critics always label as a “death tax” that only hits the very wealthy and is also a major generator of federal revenue.
The plan also focuses heavily on reducing corporate taxes. Currently the rate is 35 percent (although the actual taxes paid are calculated to be below 30 percent). It would lower this rate to 20 percent although some in the Senate are talking about a 15 percent rate—which the President prefers.
It is assumed many individual credits and deductions could go. That would likely include the adoption tax credit. It is silent on the Earned Income Tax Credit but it is believed that the EITC will remain. Some also assume there would be some form of child care tax credit since Ivanka Trump has supported such a credit.