House Releases Tax Reform Plan
On November 2, House Republican lawmakers released their plan to retool the U.S. tax code, the biggest adjustment in over 30 years. This far-reaching bill, titled the Tax Cuts and Jobs Act, seeks to streamline the existing code and lower the corporate rate to a level closer to that of other nations. The legislation also eliminates or changes some popular deductions and makes adjustments to the use of so-called pass through entities.
Among the most controversial changes is the elimination of the current state and local tax, or SALT, deduction. Under current law, taxpayers who itemize are able to deduct the amount they pay in state and local taxes from their federal tax burden. One of the six original deductions included in the 1913 code, the SALT deduction protects taxpayers from double taxation by states and the federal government. It currently applies to state and local income, sales, and property taxes. The draft eliminates the deduction in favor of a provision to allow taxpayers to deduct only property taxes. This deduction would be limited to a total of $10,000.
Another issue of concern for states are the treatment of municipal bonds. These bonds are frequently issued by states and localities to fund infrastructure or other projects. The interest accrued by bondholders is currently exempt from federal taxes. This plan does not make any changes to the taxability of municipal bonds.
Also included in the plan is a significant reduction in the corporate tax rate. This plan lowers the current statutory rate from 35% to 20%, making the U.S. rate closer to the Organisation for Economic Co-operation and Development’s average for corporate taxation. Corporations would also no longer pay taxes on active foreign income. Pass through entities, like partnerships, would be taxed at 25%. To offset the lost revenue from this reduction, this framework caps the mortgage interest deduction for new homebuyers to loans of $500,000 or less.
The number of brackets is reduced from seven to four, with top bracket’s rate of 39.6% remaining the same. Many credits and deductions are also overhauled. The Child Tax Credit is expanded from $1000 to $1600 per child, while the standard is deduction is nearly doubled. Businesses would lose the ability to deduct entertainment expenses, but the current rules for meals would remain. Although initially suggested, the plan contains no changes to the most common retirement vehicles used by Americans– the 401(k) and Individual Retirement Accounts, or I.R.A.s.
The estate tax would also undergo significant changes. The exemption would double immediately to $11.2 million per person and $22.4 per married couple. The tax would be repealed entirely beginning in 2024.
The House Ways and Means Committee plans a markup on this plan for November 6. The Senate Finance Committee has also indicated it will be releasing a plan of its own, but no date has been set.