Tax Reform: Is There Really a Chance?
Dr. David Mielke, Retired Dean, College of Business at Eastern Michigan University
Last week we discussed the House Republicans’ proposed corporate tax reforms. This week we will look at the individual reforms proposed by the Senate and the revised House proposal. Both plans keep the federal debt impact to within the $1.5 trillion over the next 10 years. There are a number of controversial provisions in the plans including the deduct-ability of mortgage interest, state and local taxes, medical expenses and college loan interest. There are also differences in the number of individual tax brackets and the rates. The Democrats have uniformly opposed the individual proposal and corporate tax changes as well—using the usual criticism that any changes benefit the rich. Should the mortgage interest deduction be eliminated or reduced? Should the deduction for state taxes, especially state property taxes be reduced or eliminated? What about medical expenses and college loan interest? Is it really possible to pass one massive tax reform bill that includes both corporate and individual taxes? Can anything be passed, even simple rate reductions without any Democratic votes in the House or the Senate? Is it time for some Democrats to support reform? What about their re-election chances if they oppose reforms that may actually be passed? What is the Right Thing to do?” Let’s look at the issues:
- The Senate corporate tax outline differs significantly from the House version in that the corporate rate reduction to 20% does not kick in until 2019—the House proposal in 2018. The Senate did this to keep the debt impact to within $1.5 trillion. Other than that difference, the corporate reform seems doable. The House Ways and Means Committee revised the original proposal and computes the impact on the debt to be $1.457 trillion.
- The House bill, in an effort to win support from Republicans in high tax states, allows deductions up to $10,000 for property taxes. The Senate bill eliminates all deductions for state and local taxes, including property taxes.
- The Senate bill would keep in place the mortgage interest deduction for newly purchased homes up to $1 million, while the House version would cut the threshold to $500,000. Existing mortgage interest would be grandfathered in under both plans.
- The Senate bill lowers rates for low and middle income Americans by effectively expanding the zero tax bracket for the first $24,000 and maintaining the 10% bracket. Their 7 brackets are 10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5% for the highest income earners.
- In contrast, the House bill condenses the number of tax brackets to 4: 12% for income up to $90,000, 25% for income up to $260,000, 35% for income up to a million and 39.6% for income over $1 million. There is also a “bubble rate” of 45.6% for certain high earners.
- Both bills would almost double the standard deduction to $24,000 for married couples, $12,000 for individual filers and eliminate the $4,050 personal exemptions.
- The Senate maintains the medical expense deduction, the House eliminates it. Both repeal the Alternative Minimum Tax. Both maintain the adoption deduction. The House eliminates the deduction for student loan interest, the Senate keeps it.
- Both bills increase the child credit from $1,000 per child to $1,650 in the Senate and $1,600 in the House. The child tax credit is refundable if there is no tax liability. It is estimated that the cost will be $640 billion over 10 years.
- The Senate bill would double the estate tax exemption from $11 million to $22 million per couple, while the House would completely eliminate it in 6 years after a series of exemption increases.
Selling a tax bill with a mix of winners and losers is what has made a comprehensive tax overhaul impossible to pass through Congress since 1986. The question is whether the Republicans can find compromises between the House and Senate to pass a single bill. Other than the timing of the corporate cuts, that part of the bill is close already. One might surmise that if reform is passed, the state and local tax deductions for all intents and purposes will be gone. Then there is the Byrd Rule in the Senate that bans deficits outside the 10 year budget window—will the final bill meet that test? However, if Congress would repeal the Obamacare mandate, there would be a $300 billion savings over 10 years, eliminating that budget worry. As of now, neither the Senate nor the House have included that provision in their bill. Will the House and Senate be able to compromise? Will they agree on the final number of brackets and the rates? What about the medical expense and student loan interest? Property taxes, mortgage interest and the estate tax? Will the final bill stay within the $1.5 trillion benchmark and comply with the Byrd Rule? Will some Democrats, especially in lower tax states realize that their constituents will benefit from the overhaul and vote for the final bill? Should the corporate and individual reforms still be in a single bill? Should tax reform be passed at all? What is the “Right Thing to do?” Tax reform should be passed—corporate and individual. Now that the Senate version has been released, I am more optimistic that it can be done in a single bill. However, that final bill will be dependent on the numbers—will they stay within the $1.5 trillion and that is where the compromises will happen. I am not pleased with the one year delay for the corporate cuts, but given the so called saving from the one year delay, I am willing to accept that given the rest of the package. In general, I like the Senate version the best—more brackets, but overall what appears to guarantee tax savings across the
board, especially for low and middle income Americans. A compromise to allow a $10,000 property tax deduction and a higher threshold for mortgage interest is possible. The medical expense deduction should also be maintained. I think any Democrat that does not vote for tax relief, and I do think a bill will be passed, unless in a high tax state will suffer consequences—as will any Republican who votes against it. As stated there is much to like and also to dislike, but compromise can lead to a tax reform that is badly needed to give individuals relief and to spur the economy. “Is There Really a Chance?” Yes!