Don't Mess With Taxes

Republicans unveiled their outline for additional tax changes on July 24 and it's just that. A bare bones framework.

House Ways and Means Committee Chairman Kevin Brady (R-Texas) acknowledged the skimpy structure. That was by design, he said, with the outline to serve as a starting point for his GOP colleagues to offer feedback.

Yes, he said Republican feedback. As with the original Tax Cuts and Jobs Act (TCJA) that was enacted last December, Democrats were excluded from the legislative writing process.

Once things are fleshed out, Brady said he expects a Tax Reform 2.0 bill to go before the House in September.

Sorry, GOP Congressional staff, it looks like you'll be spending your usual August recess getting the new tax bill in shape for when your bosses return from their late summer vacations district work sessions.

Election-driven changes: Not to be too cynical, but proposals that focus on, as Brady was happy to point out, middle-class and small-business tax cuts just before a crucial midterm election is pretty darn convenient.

That approach looks to be tailor-made to counter the major Democratic rallying cry against the TCJA is that it disproportionately rewards big business and the wealthiest Americans.

And again, not to be overly suspect of the GOP's timing, but it also sorts its Tax Reform 2.0 sorts into three categories, each with a title that makes a great campaign trail tagline: Protecting Middle-Class and Small Business Tax Cuts, Promoting Family Savings and Spurring new business innovation.

Permanent tax cuts for all: As noted, opponents of the TCJA immediately latched onto the bill's apparent favoritism of big businesses.

They say the new tax law's huge tax break for big businesses — cutting the corporate tax rate from 35 percent to 21 percent — is a permanent part of the Internal Revenue Code.

Of course, we all know that nothing within Congress' reach is ever permanent as far as Merriam-Webster defines it. Rather, this means legislatively that the law, right now, doesn't have an ending date.

Meanwhile, note TCJA critics, its tax benefits for individuals and small businesses are temporary. They are set to expire at the end of 2025.

That complaint is taken care of in the first Tax Reform 2.0 section, Protecting Middle-Class and Small Business Tax Cuts.

Here, according to the GOP, this latest round of tax law change would make permanent many of the individual and small business TCJA tax breaks that are set to expire in seven years.

This pro-growth move, argues Tax Reform 2.0 advocates, will create 1.5 million new jobs, increase wages by 0.9 percent and increase Gross Domestic Product by 2.2 percent. The Ways and Means leadership didn't provide any supporting data for these figures

New and expanded savings: The next area of focus in Tax Reform 2.0, which the GOP outlines says in most instances is woefully inadequate.

More than half of adults don't expect they will be able to save enough to retire comfortable. A third do not have access to workplace retirement plan.

To address these gaps, 2.0's Promoting Family Savings category calls for:

• USA accounts: The proposed new Universal Savings Account is described in the Ways and Means outline as "a fully flexible savings tool for families." However, aside from that and its patriotic (and campaign-ready acronym), there are no details on the account.
• Expanded 529 education account options: Here the Republicans wants to make using money in these state-administered tax-favored plans even easier than done in TCJA. If enacted, education savings also could be used to pay for apprenticeship fees to learn a trade, cover the cost of home schooling and help pay off student debt.
• New baby savings: Here money could be taken penalty-free from retirement accounts to pay for childbirth or adoption costs. Families could also pay back those accounts later.

Small businesses benefits: Finally, the third category covers, per the outline, Spurring New Business Innovation.

According to the Ways and Means leadership, the United States is falling behind when it comes to entrepreneurship. One way that Tax Reform 2.0 proposes to help encourage new businesses is to allow them to write off more of their initial start-up costs.

Just how much more is not specified. Neither are other proposals that the outline says would "remove barriers to growth."

Passage problems: While the House might be able to pass some tax bills before voters go to the polls on Nov. 6, such action is unlikely in the Senate.

That's why the Ways and Means' new tax proposals will be introduced as three separate bills, based on the areas highlighted in the outline: making temporary provisions permanent, bolstering savings and fostering innovation.

This legislative strategy will give the Senate, where the slim GOP majority will need Democratic help to get the 60 votes needed for passage, more flexibility in deciding which of the measures, if any, to consider. 

Of course, Senate Majority Leader Mitch McConnell (R-Kentucky) could call a vote for political reasons. Dems voting against tax cuts would be a nice addition to last-minute campaign ads in hotly contested state and House district races.

But some Republicans in both the House and Senate also might balk at the added costs of Tax Reform 2.0. The provisions that would make the now-temporary tax cuts permanent are estimated to be around $600 billion.

Costs be damned: Then there are those who think that 2.0 doesn't go far enough.

GOP lawmakers already have started kicking around possibilities like repealing the TCJA's tax on private college endowments, tweaking the tax treatment small businesses passthrough companies (we're still waiting on Internal Revenue Service regulations for these) and indexing for capital gains.

And, of course, if any Democrats get to make suggestions, there's the wish by California, New York and New Jersey lawmakers to reinstate full state and local tax (SALT) deduction.

Brady is urging patience, at least among his fellow Republicans.

"We're going to consider those [GOP] ideas and they certainly haven't been excluded from 2.0," he said. The matter is timing.

That means, depending on the midterm results, there could be Tax Reform 3.0 or 4.0 or even 5.0.

Technical corrections, too: Also, some concerns about the new tax laws should be addressed in a technical corrections package.

Here, lawmakers make changes to the original bill to clear up areas, for example, where the text of the law doesn't reflect lawmakers' intentions. The rush to get the TCJA on the books before the end of 2015 created many such situations.

House Speaker Paul Ryan (R-Wisconsin) has said that technical corrections would come to the House floor during the post-election lame duck session.

The reason for the delay in clearing up these confusing tax areas, said Ryan, is because Democrats are unlikely to support the corrections before the midterms. Again, that 60 vote margin will be needed in the Senate.

Flashback to the Affordable Care Act passage, where it was created and enacted without any Republican support. Democrats admitted back then that Obamacare, as it was quickly dubbed, needed some follow-up legislative work. However, Republicans refused to go along with any necessary changes, leading to many of the issues we currently face in connection with the health care law.

Rather than learn from mistakes, it looks like extreme political polarization will again rule.

And that again means, we'll have to see what happens on Nov. 6 to get an idea of how easy or difficult and Tax Reform 2.0 and technical corrections to the original will be.

You also might find these items of interest:

• IRS releases draft W-4 to reflect tax law changes
• 4 states seek court help in ending limit on SALT deduction
• A look at the new tax-reform revised Form 1040 and schedules