2017 Tax Reform: What Congress and the President are Considering

As reported by Reuters, President Donald Trump and congressional Republicans are now tackling tax reform. Tax staffers are meeting in the House of Representatives and the Senate through the August break to work on legislation that is expected to be unveiled next month.

What Congress and the White House are working on. Here are some of the key issues that Congressional staffers and the White House are working on:

Cutting, simplifying individual taxes. Americans pay a top individual tax rate of 39.6%. Trump wants to cut that top rate to 35%; House Republican leaders have proposed cutting it to 33%.

In proposals to simplify taxes, Trump wants to shrink the number of tax brackets to three from seven and double the standard deduction. The latter move, analysts say, would sharply reduce the number of taxpayers who can claim certain deductions, such as the ones for mortgage interest and charitable donations.

Trump has also promised, without providing much detail, more help for families with child and dependent care expenses and to eliminate targeted tax breaks that benefit wealthy people.

Estate tax, AMT. In two proposals that would help mainly high-income and wealthy taxpayers, Trump and congressional Republicans want to repeal the estate tax and the alternative minimum tax (AMT). The estate tax currently applies only to inheritances exceeding $5.49 million per person.

Obamacare taxes. An effort by Trump and Congressional Republicans to repeal the Affordable Care Act (Obamacare) and the taxes that support it failed in July. Those taxes, including a 3.8% surtax on investment income and a 0.9% payroll tax, remain on the books for now.

State and local tax deduction. Americans can deduct taxes paid to state and local governments from their federal tax bills. Trump and House Republican leaders want to end this. The proposal would most hurt states where Democrats dominate because those states tend to charge higher state and local taxes and provide more government services, with the result that their residents take larger federal deductions. But the proposal is opposed by at least 20 House Republicans, reducing its chances of enactment.

Mortgage, charity deductions. Tax deductions for interest paid on mortgages and donations to charities are probably safe. Trump has promised to protect them.

Yet, there has been discussion of lowering the cap on the mortgage interest deduction to $500,000 from $1 million. Analysts say that would generate enough revenue to cut the corporate tax rate by three percentage points, but such a move would pit upper-middle class and wealthy homeowners against multinational corporations.

Lobbyists for real estate businesses and philanthropies say that, if the standard deduction doubled, fewer taxpayers would be able to claim the mortgage interest and charitable giving deductions. That could undermine home-buying and donations to philanthropies, they say.

Corporate taxes. Corporations pay 35% of their profits in taxes, at least on paper. Trump wants to slash that to 15%; House Republicans want 20%; some lawmakers say 25% might be achievable. No consensus on the rate has been reached.

Pass-through businesses. Trump wants a special, low tax rate for pass-through businesses. Most U.S. businesses are pass-throughs and range from family-run shops to large businesses. The idea of a special tax rate for them raises the prospect of a new wave of tax avoidance schemes with wage earners funneling income into pass-through structures.

Repatriation, territorial. Under Republicans’ plans, about $2.6 trillion in corporate profits now parked abroad would be repatriated, or brought into the United States, and taxed at 3.5% to 8.75% payable over eight years. That rate would be way below the 35% tax that is owed now on those profits but that is payable only if they enter the country.

Republicans also want to change the corporate income tax so companies are no longer taxed on foreign profits, by adopting a so-called “territorial” system that would replace the “worldwide” system in which U.S. companies are taxed on profits globally.

A House Republican “border adjustment” tax proposal meant to discourage imports and encourage exports has been dropped.

Effect of tax reform on the budget deficit. Tax cuts generally reduce federal revenue and raise the budget deficit. The deficit is estimated in fiscal 2017 to hit $693 billion, or 3.6% of U.S. gross domestic product (GDP), up from 3.1% in 2016.

With that in mind, Republican deficit hawks could make it hard for Trump to push through any deficit-expanding tax measures.

Some Republicans want Congress’s nonpartisan, professional tax and budget analysts to make more use of “dynamic scoring” in estimating the impact of tax changes on the budget. The approach tends to assume an increased economic stimulus effect from tax cuts, resulting in smaller projected increases to the deficit.

President to reveal a framework for overhauling the Code. The White House plans to release a brief document in early- to mid-September outlining a framework for overhauling the Code. The three-to-five-page document would not be accompanied by tax legislation. The framework would come from the “Big Six” congressional and administration leaders on tax reform, the same group that released a joint statement on taxes in July, after months of closed-door talks.

Jeffrey G. Cohen Jeffrey G. Cohen, CPA is the Partner-in-Charge of Tax Services at Grassi. With over 30 years of experience, Jeff specializes in serving companies within the Manufacturing and Distribution Industry, with an emphasis on the Food & Beverage and Pharmaceutical sectors. A leading tax expert in the New York Metropolitan area, Jeff has enabled his clients to realize significant tax savings through proper Income and... Read full bio