NOTE: This post is a preview of a Pro Bill Analysis from POLITICO Pro's Legislative Compass tool. This excerpt was originally published on Nov. 20, 2017.
By KAITLYN BURTON
11/20/2017 09:31 PM EST
The House passed a sweeping, $5.5 trillion tax bill, H.R. 1 (115), on Nov. 16 by a vote of 227-205.
The legislation would slash the corporate tax rate to 20 percent starting next year, down from 35 percent. It sets the top small business rate at 25 percent for pass-through entities and also includes a far lower rate of 9 percent for some types of small businesses on the first $75,000 of profits. For individuals, it axes a number of popular deductions, including the state and local tax deduction, medical expenses deduction and student loan deductions but would double the standard deduction and condense the seven tax brackets into four.
For additional context, take a look at the Ways and Means Committee’s section-by-section summary released with the original bill text here, along with summaries of the first and second manager’s amendments offered by Chairman Kevin Brady (R-Texas) to the chairman’s mark substitute amendment.
Individuals (Title One)
Tax brackets (Sec. 1001): The bill would decrease the number of tax brackets from seven to four and cut tax rates for all incomes under $1 million. This means that unless you (and your spouse) make more than $1 million, the baseline rate you would pay on taxes before factoring in deductions would go down. It would maintain a 39.6 percent rate on top earners.
Here’s how the bill would lay out the brackets:
It would get more complicated if you are single or file separately, but the bracket thresholds would be roughly half how they appear above for individuals, with exceptions depending on the bracket. These values would be adjusted by the chained consumer price index, or CPI.
Both the chained CPI and the traditional CPI are measures of inflation. However, the chained CPI attempts to account for the effects of people substituting one good for another when prices change in the cost of living, according to the CBO.
JCT estimates that this section would reduce revenues by $961.2 billion over 10 years.
Standard deduction (Sec. 1002): The measure would roughly double the standard deduction to $12,000 for individuals and $24,000 for married couples. Individual filers with at least one child could claim a standard deduction of $18,000. These values would be adjusted by the chained CPI.
Taxpayers could choose the standard deduction instead of itemizing their deductions in their tax returns.
This provision simplifies the tax code but could also see people who use several of those deductions pay more in taxes overall because their effective rate (the rate they pay now after taking those deductions) would go up.
Charitable and real estate industries have long been worried about the GOP's proposal to increase the standard deduction, an outcome that would reduce the number of taxpayers who use the deductions for mortgage interest and charitable contributions.
JCT estimates that this section would reduce revenues by $921.4 billion over 10 years.
Personal exemptions (Sec. 1003): The bill would nix personal exemptions, which are designed to adjust tax burdens for family size.
Experts have warned that some low-income people would see tax increases under the plan because it would replace personal exemptions with family-related tax credits. Particularly for large families, the credits would not be big enough to make up the difference.
JCT estimates that this section would increase revenues by $1.5621 trillion over 10 years.
Pass-throughs (Sec. 1004): Brady’s second manager's amendment to the chairman's mark added language to the bill that would offer a new 9 percent tax rate to small businesses, a bid to win over the National Federation of Independent Business, an influential small-business advocate, which had been unhappy with the initial plan.
The provision would allow the 9 percent rate, in lieu of the ordinary 12 percent tax rate, for the first $75,000 in net business taxable income of an active owner or shareholder earning less than $150,000 in taxable income through a pass-through business. As taxable income exceeds $150,000, the benefit of the 9 percent rate relative to the 12 percent rate would be reduced, and it would fully phase out at $225,000. Businesses of all types would be eligible for the 9 percent rate, which would be phased in over five taxable years — beginning at 11 percent in 2018 and 2019, falling to 10 percent in 2020 and 2021, then 9 percent beginning in 2022. JCT estimates the language would cost $60.8 billion over 10 years.
The second manager’s amendment also struck language in the underlying bill concerning taxes paid by self-employed business owners under the Self Employed Contributions Act. The amendment keeps the current law in place regarding payroll taxes on amounts through a pass-through. JCT estimates that keeping the current regulation would cost $87.8 billion over 10 years when compared to the original bill language.
Language from the original bill not altered by the manager’s package would let non-corporate companies known as pass-throughs use a top tax rate of 25 percent for their business income.
This sounds easier than it is because defining business income is tricky, and the NFIB quickly came out against the idea. The proposal also excludes certain professional services companies, law firms, financial services companies and health care companies from the 25 percent rate, an idea that has also drawn opposition.
The bill proposes safeguards meant to distinguish money attributable to business earnings from wage income for the owners and shareholders.
Only business income would qualify for the maximum 25 percent rate instead of ordinary individual income tax rates, which could be higher in some cases.
To prevent cheating, owners or shareholders can generally choose to designate 30 percent of the net business income derived from active business activities for the lower tax rate, leaving the remaining 70 percent subject to ordinary individual income tax rates. But they could also opt to apply a formula based on the facts and circumstances of their business to determine a capital percentage that exceeds 30 percent.
Child tax credit (Sec. 1101): The bill would raise the child tax credit from $1,000 to $1,600 per child — with the first $1,000 being refundable. The $1,000 amount would be indexed for inflation, and a greater swath of individuals could take advantage of the credit because the bill would raise the income thresholds.
The section would also create a new $300 credit for adult dependents, as well as a $300 “family flexibility” credit for taxpayers who are neither children nor non-child dependents.
The phase-out for these three credits would be increased to $230,000 for joint filers, up from $110,000, and to $75,000 for single filers, a boost from $115,000.
JCT estimates that this section would reduce revenues by $640 billion over 10 years.
Repeal of various credits (Sec. 1102): The bill would eliminate the credit for individuals who are over the age of 65 or who have retired on disability ($7,500 joint and $5,000 single), a credit for home mortgage credit certificates and an electric vehicle tax credit ($7,500 per vehicle).
The measure as introduced also would have eliminated the adoption tax credit ($13,570 per eligible child), but many conservatives objected to the provision and Brady’s second manager's amendment to the chairman's mark removed the language that would repeal the credit. JCT estimates that reinstating the credit would cost $3.8 billion over 10 years compared to the bill as introduced.
Taxpayer identity verification (Sec. 1103): The plan would block most undocumented immigrants from claiming a child tax credit and an education-related tax credit.
Under current tax law, an undocumented immigrant can file taxes with an Individual Taxpayer Identification Number, or ITIN, in lieu of a Social Security number. The identification number can be used to claim a child tax credit that currently provides up to $1,000 per child. But under the bill, an ITIN would no longer be acceptable for the new $1,600 child tax credit. Instead, the taxpayer would be required to have a work-eligible Social Security number.
The same change would apply to the American Opportunity Tax Credit, which currently offers a tax credit up to $2,500 for higher education expenses.
The White House urged Congress in its fiscal 2018 budget to make a work-eligible Social Security number a requirement to claim the child tax credit. An audit by the Treasury Inspector General for Tax Administration found people without work authorization were paid $4.2 billion in refundable credits in 2010.
Brady’s second amendment to the mark added language that would require taxpayers claiming the child tax credit to provide a Social Security number for their child. JCT estimates that requiring the child to have a Social Security number would raise $20.4 billion over 10 years.
American Opportunity Tax Credit (Sec. 1201): The bill would eliminate the Hope Scholarship and Lifetime Learning credits, which the Ways and Means summary of the bill said “would be consolidated into an enhanced” AOTC. The AOTC, which provides a maximum credit of $2,500 per year for higher education expenses, is currently available for up to four years of college. Under the plan, it would be available for a fifth year, during which time individuals could receive a maximum credit of $500.
JCT estimates that this section would increase revenues by $17.3 billion over 10 years.
Education savings accounts (Sec. 1202): The measure would end Coverdell Education Savings Accounts — tax-free accounts that have allowed families to set aside up to $2,000 to cover K-12 costs, like private school tuition — and expand 529 college savings accounts to cover K-12 expenses of up to $10,000 per year at public, private and religious schools. Coverdell accounts are income-restricted, applying to families in lower tax brackets, while 529s are open to everyone.
Public school advocates and teachers' unions said the plan is misguided because it would allow even the wealthiest Americans to use tax-free accounts for K-12 private school tuition, advancing the cause of school choice.
Meanwhile, groups that support school choice either praised the bill or expressed some disappointment that lawmakers didn't make a bigger play.
The proposal would also open up 529s to what the legislation calls "unborn children" as designated beneficiaries. The bill text specifically defines that as “a child in utero,” and defines that as “a member of the species homo sapiens, at any stage of development, who is carried in the womb.” The language would allow expectant parents to start putting away money for college and private school tuition, wading into the battle over when human life begins.
Student loan forgiveness (Sec. 1203): The legislation would exclude student debt forgiven due to death or total disability of a student from the borrower’s taxable income. Under current law, the amount of student debt forgiven for death or total disability is taxed as income.
JCT estimates that this section would reduce revenues by $100 million over 10 years.
Higher education deductions (Sec. 1204): The bill would eliminate the current tax deductions for interest paid on student loans and college tuition and related expenses. It would also get rid of tax breaks for the tuition discounts that colleges offer their employees as well as for all employer-provided educational assistance programs.
JCT estimates that this section would increase revenues by $47.5 billion over 10 years.
ABLE accounts (Sec. 1205): Brady’s second amendment to the chairman’s mark added a new section that would allow excess 529 education savings account assets to be rolled over into an ABLE account, which are tax-advantaged savings accounts for individuals with disabilities established under H.R. 5771 (113). JCT estimates that the section would reduce revenues by less than $50 million over 10 years.
Overall limitation on itemized deductions (Sec. 1301):
Mortgage interest deduction (Sec. 1302): It would install new limits on the popular mortgage interest deduction, where individuals could only deduct interest on the first $500,000 of their loans for newly purchased homes, down from the current $1 million limit. It would also eliminate the break for second homes.
SALT and property tax (Sec. 1303): The bill would eliminate a deduction for state and local income and sales taxes, while keeping a property tax write-off that would be capped at $10,000.
Public school advocates on Nov. 2 criticized a Republican compromise over the state and local tax deduction, known as SALT, saying it could starve public schools of funding.
The initial tax reform proposal rolled out by President Donald Trump and GOP leaders in September called for eliminating SALT, which allows individuals to subtract from their federally taxable income some or all of what they pay on real estate property, income, personal property and sales. Advocates say the deduction serves as an incentive, in the form of lower taxes, to pay state and local taxes for public education, among other things.
Personal casualty losses (Sec. 1304): The measure would repeal the deduction for personal casualty losses, including property losses from fire, storm, shipwreck or theft, unless the losses are associated with special disaster relief legislation, such as those enacted by Congress and the president after the 2017 hurricanes.
Gambling losses (Sec. 1305): It would limit deductions for all wagering transactions to the extent of wagering winnings.
Charitable contributions (Sec. 1306): The bill would revise deductions for charitable giving, increasing the limit for contributions to charities and foundations from 50 percent of adjusted gross income to 60 percent of AGI.
Various deductions (Sec. 1307-1310): It would eliminate deductions for tax preparation expenses, medical expenses, alimony payments and moving expenses in connection with a new job.
The medical expense tax deduction is popular with Americans who have high medical costs. It is used by comparatively few tax filers, but its impact can be significant for those with large medical bills, including nursing home expenses, insurance premiums paid with after-tax dollars or other medical tabs. Under current law, Americans can deduct their medical expenses from their taxes if their total out-of-pocket spending exceeds 10 percent of AGI. Obamacare bumped the threshold from 7.5 percent.
AARP, the influential seniors lobby, said repeal of the deduction could especially harm middle-income seniors. "Eliminating the medical expense deduction amounts to a health tax on millions of Americans with high medical costs — especially middle-income seniors. AARP is strongly opposed to this provision," said Nancy LeaMond, AARP executive vice president.
The second Brady amendment to the mark revised the moving expense language to preserve the current-law deduction for members of the armed forces.
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