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The Trump administration and congressional leaders revealed the framework for their new tax reform plan on September 27, 2017 with the hope of passing comprehensive tax reform legislation by the end of 2017. 

PROPOSED TAX REFORM FOR BUSINESSES 


Under the proposed tax reform package, businesses would see several changes, including:

  • Reduction of the highest marginal corporate tax rate from the current 35 percent to 20 percent.
  • Capping the maximum tax rate on pass-through business income for small businesses to 25 percent.
  • Immediate capital expensing rather than depreciating those costs over time.
  • Limitation on the net interest expense deduction for C corporations.
  • Elimination of taxes on foreign earnings by multinational corporations with immediate “deemed repatriation” of past earnings at a discounted rate.
TAX REFORM FOR INDIVIDUALS AND FAMILIES

The newly unveiled framework also provides changes for individuals and families, including:

  • Increases the standard deduction to $24,000 for married taxpayers filing jointly and $12,000 for single filers.
  • Consolidates the current seven tax brackets into three brackets - 12 percent, 25 percent and 35 percent.  An additional top rate may apply to the highest-income taxpayers so the tax burden is not shifted to lower- and middle-income taxpayers. 
  • Eliminates most itemized deductions, including the state and local tax deduction, but retains deductions for home mortgage interest and charitable contributions. 
  • Eliminates the Alternative Minimum Tax. 
  • Eliminates the estate tax, which applies to those with assets of more than $5.49 million.
So what is the likelihood of the passage of the tax reform package? Based on the current climate in Washington, it will be difficult.  In addition, the following items will impact the likelihood of passage.

FAILURE TO PASS THE REPEAL OF THE AFFORDABLE CARE ACT (ACA) MEANS CUTTING TAXES WILL BE MORE DIFFICULT


Without the ACA repeal, tax reform will be more difficult. Here’s why:

The quickest way to pass comprehensive tax reform is to use the budget reconciliation process, which allows Congress to fast-track legislation by only requiring 50 votes to pass the Senate. There are strict rules that go along with using reconciliation, one of which is that the legislation generally must be “revenue-neutral,” i.e., any tax cut being considered must be “offset” or balanced by either reductions in tax subsidies or increases in revenue elsewhere.

The ACA included about $800 billion of taxes. These taxes include the net investment income tax, the individual mandate (a tax penalty on individuals who fail to obtain health insurance), and the medical device tax, among others. These taxes were supposed to be eliminated in FY 2017 through the repeal of the ACA.  If this had occurred, a lower revenue threshold would have been set when Congress took up tax reform in FY 2018.

Because the federal government is bringing in more revenue as a result of the ACA taxes, Congress needs to figure out how to maintain that higher revenue threshold while still keeping their promise to dramatically reduce taxes under this new framework.

This higher threshold also makes it likely that Congress will look towards making cuts to entitlement programs, such as Medicaid or the SNAP food stamp program, in order to pay for tax reform. While this might help solve the math problem, the optics of taking money away from a portion of the population to pay for tax cuts tends to be problematic and would be difficult to accomplish.

DEATH OF THE BORDER ADJUSTMENT TAX 

Remember the Border Adjustment Tax? We discussed it last spring as a potential revenue raiser.  However, the idea of the BAT appears to be dead. Over the summer, in response to objections from the retail industry, the White House and Congressional Leadership released a “Statement of Principles” stating that the BAT would no longer be a part of any tax reform consideration. Without the BAT, the Republicans will need to search elsewhere for revenue raisers.

While the framework provides an understanding of the ideas being proposed by the Trump administration and Congress, there are additional questions that need to be answered.  We will provide further updates as these questions get answered.

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