Thursday, November 16 was a big day for tax cut advocates. The House of Representatives passed their tax bill (HR 1) by of 227 to 205 with all but 13 Republicans and no Democrats voting for it. Later that evening the Senate Finance Committee passed their counter proposal out of Committee by a vote of 14 to 12.
The House Republican bill totals $5.5 trillion with $1.5 trillion scored as increasing the deficit. The vote by the House came shortly after the Republican caucus was addressed by the President and reportedly he encouraged them in his remarks. Of significance, it was also reported that he encouraged House members to do “welfare reform” next.
The key features of the House bill include:
Four tax brackets: The top 39.6% bracket would be elevated to income greater than $1 million, the 35% bracket would apply to income from $260,000 to $1 million; the 33% bracket would be eliminated, the 25% bracket would apply to income from $90,000 to $260,000; and a new 12% bracket would apply to income from $0 to $89,999.Standard deductions would be double to roughly $12,000 for single filers and $24,000 for couples with personal exemptions eliminated and most deductions eliminated.
The Child Tax Credit would increase from $1000 to $1600 but the increase would not be available to lower income because it is not refundable. The personal exemption for children is eliminated.
State, local taxes and mortgage interest, for income taxes no deduction would be allowed, the mortgage interest deduction would be capped at $500,000 in housing value and the maximum deduction for property taxes would be set at $10,000.
For wealthy taxpayers there would no longer be the AMT or “alternate minimum tax” and the inheritance tax would be eliminated in six years after being doubled to an exemption of $11 million per single person and $22 million per couple.
Corporate taxes would be cut from 35 percent to 20 percent and for small and individual business they would no longer be taxed at the maximum 39 percent rate but instead be capped at 25 percent.
The key features of the Senate bill include:
Seven tax brackets at 10 percent, 12 percent, 22.5 percent, 25 percent, 32.5 percent, 35 percent and 38.5 percent for the nation’s highest income earners. The top rate is for individuals who earn $500,000 and couples who earn $1 million.
Standard deductions would be double to roughly $12,000 for single filers and $24,000 for couples with personal exemptions eliminated and most deductions eliminated.
The Child Tax Credit would increase from $1000 to $2000 but the increase would not be available to lower income because it is not refundable. The personal exemption for children is eliminated.
State and local taxes, neither state and local income taxes or property taxes would be deductible, the mortgage deduction would be capped at current $1 million but no interest deductions for equity loans would be allowed.
For wealthy taxpayers there would no longer be the AMT or “alternate minimum tax” and the exemption from inheritance tax would be doubled to $11 million and $22 million for couples. That would cost $94 billion over ten years.
Corporate taxes would be cut from 35 percent to 20 percent and for small and individual businesses; they would no longer be taxed at the maximum 39 percent rate but instead be capped at approximately 30 percent starting at 17 percent.
Individual Mandate to purchase health insurance is repealed in the bill saving $338 billion over ten years and reducing health insurance coverage by 4 million next year and 13 million over ten years.
Tax Bill’s Winners or Losers
What the Congress is doing is pulling out by its roots not just the tax code but the entire policy apparatus that has long and deep impact on the economy. It will have significant impacts across the board that is so complex they may not be easily understood. For example a middle income family may be able to receive over $800 a year in reduced taxes as the Speaker has argued. If however the overall tax policy makes home buying less appealing and damages the value of that family’s home ( by ten percent according to some analysis) due to the limitations on deductions for interest and property taxes, that family may have lost value on their most valuable and likely only long term investment/asset.
Such cross-currents in impact could be many. Both bills encourage most tax payers to no longer use a long form. That may discourage the deduction of charitable contributions and the year-end incentive to give. Other examples and impacts could include the elimination of the ability to deduct high cost medical expenses. A family may net a decrease in taxes but what if that family has a high cost health care needs such as the health needs of a child with high cost medical needs.
And then the budget…
The tax bill will increase the deficit by $1.5 trillion over the next budget decade if enacted as it stands today. The Congressional Budget Office was asked to determine what that would mean for spending programs in the coming year as a result of current spending restrictions.
Spending is limited according to the Statutory Pay-As-You-Go Act of 2010 (PAYGO; Public Law 111-139). The PAYGO law requires new legislation enacted during a term of Congress not to increase estimated deficits. If that legislation does that, the Office of Management and Budget (OMB) is required to maintain two so-called PAYGO scorecards: spending over the next five years and ten years. If either scorecard indicates a net increase in the deficit, OMB is required to order a sequestration (cuts) to eliminate the overage.
CBO was asked to assess the impact of this bill without enacting any further legislation to offset that increase. According to a report issued by CBO:
“Without enacting subsequent legislation to either offset that deficit increase, waive the recordation of the bill’s impact on the scorecard, or otherwise mitigate or eliminate the requirements of the PAYGO law, OMB would be required to issue a sequestration order within 15 days of the end of the session… [Congress would be required] to reduce spending in fiscal year 2018 by the resultant total of $136 billion. However, the PAYGO law limits reductions to Medicare to four percentage points (or roughly $25 billion for that year), leaving about $111 billion to be sequestered from the remaining mandatory accounts.”
In other words regardless of what Congress does regarding the current FY 2018 appropriations budget caps, there could be another set of across the board cuts that would severely cut programs like SSBG, Promoting Safe and Stable Families and other children’s services and other programs not protected from the sequestration laws.
These provisions in the current tax bill if left unaddressed and the President’s comment to House Republicans that they should work on “welfare reform” next along with demands from key House leaders to cut mandatory and entitlement programs could very well make the year of 2018 a year of major budget cuts to children’s programs across the board.