WASHINGTON ― Republicans prepared to finally unveil their tax reform legislation Thursday with a draft bill that would dramatically cut taxes for corporations and the wealthy.
GOP legislators generally stuck to their already released framework for the legislation: lowering individual and corporate tax rates while eliminating most individual deductions. But they also showed a willingness to jettison major aspects of their plan in order to get a bill through Congress.
While Republicans have been dead-set on repealing the so-called death tax, the new bill wouldn’t immediately do that. Instead, it would double the amount of wealth not subject to the tax, and institute a full repeal in 2024. The law currently applies only to estates transferred at death worth more than $5.49 million for individuals and $10.98 million for couples. By delaying a full repeal, House lawmakers may be signaling to their Senate colleagues that they’re open to keeping the tax in some form.
House Republicans were less moderate in reducing the corporate tax rate from 35 percent to 20 percent. There was some discussion about phasing in the cut or making it temporary in an effort to reduce its almost $2 trillion cost over 10 years, but the GOP draft bill would immediately and permanently lower the rate, something President Donald Trump has been insistent about.
The GOP tax plan:
Cuts corporate tax rate from 35 to 20 percent
Phases out a tax on super wealthy estates
Makes more wealthy families eligible for child tax credit
Keeps top bracket of 39.6 percent, but sets the rate at a much higher income level
The legislation isn’t without controversy. A long-considered provision repealing a deduction for state and local taxes has riled a significant faction of Republicans from high-tax states like California, New York and New Jersey.
But Republicans have generally shown a lot of willingness to go along with their leadership in order to support tax cuts. Not a single California Republican voted against a budget setting up this tax bill, even though they knew the GOP intended to end the state and local writeoffs.
House Republicans from New York and New Jersey weren’t as forgiving. Seven out of nine New York legislators, and four out of five New Jersey ones, voted against the last budget. If those members held strong against the tax bill, it could make passage difficult.
But leaders gave those lawmakers at least something to mollify their opposition. While deductions for state and local income taxes will still be eliminated, the new plan maintains a deduction for property taxes.
“I’m worried about ordinary Americans, middle-income people that their real asset in life is their home ... and they have high property taxes,” Rep. Tom MacArthur (R-N.J.) said Wednesday.
It won’t necessarily make voters from high-tax areas whole, and there is a possibility that many families from those states will see their taxes rise under this plan. But it might muddle the issue enough that some Republicans from those states might still vote for the bill.
There are two main reasons for eliminating the local tax deduction. One is that taking away most deductions simplifies the tax code. The other is that axing this particular deduction raises $1.3 trillion over 10 years, which helps reduce the revenue loss from the bill’s massive cuts to business taxes.
The bill also raises revenue by eliminating the personal exemption, which allows a household to reduce its taxable income by $4,050 for each member. Getting rid of this exemption brings in another $1.5 trillion.
Finding a way to reduce the bill’s huge deficit impact has been important to tax writers, though the bill will still almost certainly add to the debt. Republicans have budgeted for the tax bill to increase the debt by $1.5 trillion, though the House version of that legislation might exceed that limit.
Still, fiscal concerns have constrained the legislation’s authors. It’s why they’ve decided to keep a top tax rate for millionaires. Under the plan, income above $1 million would be taxed at 39.6 percent. Current law applies that rate to income above $400,000 ― so even though the plan keeps the top bracket, it still represents a tax cut for high earners.
The bill’s key benefit for middle-class households, aside from lower income taxes, has been a boost to the so-called standard deduction. The deduction currently allows a family to reduce their taxable income by $12,700 ― an option that the vast majority of households take instead of itemizing local taxes and mortgage interest payments. The bill would increase the deduction’s value for a family to $24,000. Trump and House Speaker Paul Ryan (R-Wis.) have repeatedly touted this “doubling” of the standard deduction. But the increase isn’t necessarily enough to offset the loss of personal exemptions that are especially valuable to families with multiple children.
In the past few weeks, Republicans have admitted that their framework wouldn’t necessarily give a tax cut to all middle-class households. But they also said an unspecified increase in the child tax credit would help offset the loss of the personal exemption.
The legislation being unveiled Wednesday increases the child tax credit to $1,600 from its current per-child maximum of $1,000. A Tax Policy Center Center analysis of an earlier proposal, which would have increased the credit to $1,500, noted that it would mostly have benefited higher-income taxpayers.
The bill also makes wealthy families eligible for an expanded child credit, deemed a “family credit” by House Ways and Means Chairman Kevin Brady (R-Texas). While the credit currently phases out for incomes above $115,000, the Republican bill would push the threshold to $230,000.
It’s not clear if the expanded credit will fully offset the loss of the personal exemption and itemized deductions for every middle-class family. Asked how many families might see a tax increase under the bill, Brady said only that low-income families would not.
“We have hundreds of millions of tax filers in America,” Brady said. “Would some see a tax increase there among our most modest earners? And that answer is zero.”