Aug 24, 2018

Tax Reform 2.0 – Already?

Robert Duquette, CPABy Robert Duquette, CPA

CPAs had barely digested the Tax Cuts and Jobs Act (TCJA) enacted last December, when, on July 24, 2018, Kevin Brady (R-Texas), chair of the House Ways and Means Committee, announced that the House wanted to immediately “build on the growing successes of last year’s tax reform legislation.” Specifically, Brady said he wanted to provide more certainty about many of the provisions in the TCJA and “ensure this energized economy continues to move forward.” He unveiled the House GOP Listening Framework (the framework), dubbed Tax Reform 2.0, to be discussed and debated through the end of the summer. He expects to put a proposal to a vote in the House in September, ahead of the midterm elections.

Tax Reform Update logoHere are some of the highlights of the proposal:

Protecting the Middle Class and Small-Business Tax Cuts – The centerpiece of the proposal is to make permanent the individual taxpayer portion of last year’s tax cuts. Currently, the individual taxpayer sections of last year’s tax reform package are set to expire at the end of 2025, and revert to pre-TCJA tax rates, among other provisions. It is unclear if the proposal would also make permanent the liberal bonus depreciation provisions of certain tangible property and equipment, currently scheduled to expire at the end of 2026. Brady stated that he expects making the individual provisions permanent would, over the next 10 years, create 1.5 million more jobs and increase gross domestic product (GDP) 2.2 percent (i.e., an average of 0.2 percent a year).

Promoting Family Savings – This section has two parts: a reference to retirement savings and an unspecified “range of proposals” to encourage employers to provide more retirement savings options for employees, and “family-friendly savings plans.” These plans include a new Universal Savings Account, which presumably would be a tax incentivized vehicle to encourage more and earlier savings; an expansion of the 529 education accounts to allow for paying off student debt, home schooling, and learning a trade; and “New Baby Savings” to allow families to access their retirement accounts penalty-free for expenses related to “welcoming a new child into the family, whether by birth or adoption.”

Spurring New Business Innovation – This provision of the framework has two main topics: a reference to “Growing Brand-New Entrepreneurs” to spur more innovation; and allowing new businesses to have immediate expensing of their startup costs.

Separate from the above framework, but a significant side issue, President Donald Trump and Treasury Secretary Steven Mnuchin recently announced that they are asking Congress to index capital gains (i.e., restating the gain or loss, or cost basis, in connection with dispositions of property, so that the recognized gain or loss will be the true economic gain or loss without being distorted for inflation). Since it is widely predicted that we will face a more inflationary economy over the long term, this provision would presumably encourage more investment. The administration then announced that the Treasury Department is looking into how to enact this provision without Congress if needed. The administration believes it has this authority by revising or clarifying the term “cost.”

The Ways and Means Committee is also working on technical corrections to the TCJA in the individual, business, and international areas.

So, what are the implications and issues of all these proposals?

With regard to Tax Cuts 2.0, although the House wants to pass that legislation ahead of the midterms, it does not seem likely to pass the Senate. Since it could not be brought up under Budget Reconciliation like the TCJA was (and only need 51 votes to pass), Senate leadership would need 60 votes to pass it. That being the case, some Democrats would have to support it, and it would have to be enough to offset some Republicans who appear to be against it.

The reason for the pushback against Tax Cuts 2.0 by many in Congress is because recent polls suggest that less than 40 percent of voters support the TCJA. This is presumably due to the widespread belief (supported by the Tax Foundation, the Tax Policy Center, and other credible analysts) that most of the benefits of TCJA went to the top 5 percent, at a projected cost of $1.5 to $2 trillion over the next 10 years, with only a modest one-half point annual GDP growth improvement, from 3 percent to 3.5 percent, annual average over the next 10 years. Additionally, Tax Cuts 2.0 is expected to cost an additional $600 billion over the next 10 years, while increasing GDP a total of 2.2 percent over those 10 years, or less than a half percent per year.

With respect to the needed technical corrections, House Speaker Paul Ryan stated that due to lack of support, he does not expect that technical corrections can be taken up before the midterms and, therefore, will not be a part of Tax Cuts 2.0.

Finally, with regard to the indexing of capital gains, it is highly probable that the Democrats will not support the indexing of capital gains. The perception is that this would be a huge “giveaway to the rich,” and the empirical data seems to be on that side of the argument. According to the Penn Wharton Budget Model (a frequently cited source by critics of indexing), the projected national debt cost would be about another $100 billion over the next 10 years, and that the top 1 percent of taxpayers would receive 86 percent of the benefit, and 63 percent of the total benefit would go to the top 0.1 percent.

I am not holding my breath for any meaningful tax legislation until after the midterms. Even then, it is uncertain what the majority party will be able to convince 60 Senators to pass.

Robert Duquette, CPA, is a professor of practice in the College of Business and Economics at Lehigh University, an active member of the Griffin/Stevens & Lee Tax and Consulting Network, and a retired EY senior tax partner. He has served for over 20 years on PICPA’s Federal Tax Committee, focusing on federal tax reform and the national debt. 

Join us for the PICPA Federal Tax Reform Conference this October, and better understand the Tax Cuts and Jobs Act and how it affects Pennsylvania.

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  • CHARLES DENCH, CPA | Aug 29, 2018

    First I do not totally support the TCJA.  It was not the way I would have handled reducing of income taxes.  I rated the tax cuts at about a 75% score.  Second, I believe that it is very misleading to l;ook at raw numbers in tax cuts by wage groups and not compare tax percentage cuts.   Yes it maybe true that 83% of the tax cuts went to the top 1% income earners, but as I understand it they had been paying over 90% of the income tax.  And now they are projected to pay an even larger percentage of the Total Income tax each year.   An example is a taxpayer (husband/Wife, No Children, PA Res) with just over $500,000 in Gross Income and over $130,000 Fed Income tax and add'l medicare tax form 8959.  His expected tax reduction is under $15,000.    which is approximately 11 1/2% of his total tax.   Then I looked at another individual (similar H/W, both seniors, PA Res) with just over $111,000 in Gross Income and $13300 of Fed Income Tax.  There estimated savings for 2018 is over $3,300 or just under 25%.  OK Yes the $3,00 savings for the 2nd example is much lower then the $15,000 for the family in ea 1, but the ex 2 family is actually savings over 2 times the percentage of tax.   And most of my clients with less income are going to save a larger Percentage reduction in Tax then those with income over $300,000. 

    Then the article makes it sound like wow we are making a change already, when we are already dealing with the TCJA Changes.  Well it seems that with most major/or even smaller tax bills over the past 10 to 20 years, we always seem to need a technical corrections bill.  And the Major part of the proposed bill does seem to be much like a corrections bill that is making some of the tax cuts permanent.  How does that make a major change in preparing 2018 income tax. 

    Having said that we should be looking at the actual changes not all this other nonsense.  No I do not support some of the changes as proposed.   Such as indexing of capital gain income.  That just seems WRONG!  The capital gain income already benefits from growth each year (Much like a retirement plan) without having to pay income tax.   Now they want additional savings, No that I do not support that change.  For the other changes I would need to see more detail to make analysis.

    To Imply "Tax Reform 2.0 Already" I think is NOT appropriate.  



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