Flattened brackets? Check. Deductions eliminated? Check. Repeal of the Alternative Minimum Tax? Check — and that may be one of the main sticking points in the new Republican income-tax reform package. NPR calls it the “biggest … overhaul in a generation,” echoing the GOP and Trump administration’s intent to evoke the memory of Ronald Reagan. But can the fractured GOP push this through Congress any more effectively than their failed attempts to repeal ObamaCare?
While many of the details still have to be filled in, House and Senate GOP leaders have been meeting for months with the Treasury secretary and a top White House economic adviser to fashion a plan they can agree on.
It would cut the top individual income tax rate from 39.6 percent to 35 percent and slash the corporate rate from 35 percent to 20 percent. The plan would also create a new, 25 percent rate for so-called “pass-through” businesses that are currently taxed at the individual rate.
Republicans have included corporate income tax reform in the package too, with a special eye on international competitiveness. The corporate tax rate will get cut from 35% to 20%, while removing penalties for overseas profits. They also want to encourage repatriation of capital in order to fuel domestic investment, but don’t expect that to go unchallenged by Democrats, who will cast it as a form of corporate welfare:
The plan would end taxes on the profits that multi-national companies earn outside the country, and allow those companies to repatriate past profits at a discounted rate. In addition, for at least five years, the plan would allow companies to write-off the cost of investments immediately, rather than deducting those costs over time as they do now.
Republican backers have framed the tax overhaul as a much-needed boost for the middle class. It would nearly double the standard deduction, so fewer people would have to go through the trouble of filing an itemized return.
Democrats will object even more strenuously to the elimination of the Alternative Minimum Tax as a sop to the wealthiest Americans. The AMT was originally imposed to ensure that the very wealthiest income earners would have to pay some taxes regardless of how well they sheltered their income. However, Congress never indexed the AMT, which created risk for millions of Americans — including small-business owners — in falling into a trap of unexpected tax liabilities. In effect, the GOP framework states, the AMT “requires taxpayers to do their taxes twice.” CBS’ Mark Knoller sums it up nicely:
Plan also calls for repeal of the Alternative Minimum Tax – which adds additional taxes on many taxpayers for incomprehensible reasons.
— Mark Knoller (@markknoller) September 27, 2017
The White House signaled that they might be open to adding a separate tax bracket for the wealthiest earners in place of the AMT, perhaps hoping to woo more moderate Democrats into negotiations on the package. However, another part of this tax reform will likely get more attention from Democrats, especially those from high-tax blue states. Even some Republicans may balk at this change:
Popular parts of the plan — cutting tax rates for individuals and businesses and increasing the child care credit — are the easy part.
But even before all the details are out, divisions are emerging.
For example, the plan will likely fund rate cuts in part by nixing or trimming the state and local tax deduction. That break primarily helps big Democratic states, putting Republicans from places like New York and California in an uncomfortable spot.
This tax deduction essentially passes the bill for high income tax rates in blue states to the federal government, which help Democrats push those policies in the states. Of course, Democrats have hit a historic low in control of state houses, but the elimination of the state-tax deduction this will put even more pressure on states to cut their rates — and their budgets. It shifts the responsibility for state tax policies back onto state governments, as it should be, but don’t expect blue-state politicians of either party to let that pass unchallenged.
That’s going to be true for most of this effort. This package still remains in its conceptual stage; legislative language will get generated in committee, thereby pleasing John McCain’s demand for regular order, even if it still gets attached to a reconciliation package. As a statement of principles, it makes a good case for support, especially in terms of the individual tax reforms. By the time it gets through the House and Senate, though, it might look considerably different. Republicans had better hope for more unity of purpose on this effort than they had with ObamaCare repeal if they want to chalk up a W.