Republicans sprint toward comprehensive tax reform, begging the question: What’s in store for the American taxpayers?
The Tax Cuts and Jobs Act is poised to be the most significant Republican accomplishment in recent memory. House Republicans successfully passed their version of the legislation Thursday. The vote primarily split along party lines, with a handful of Republicans defecting. The Senate’s bill won approval just hours later during a committee vote, which means it can now go on to a final vote.
Their overall aim is to reduce rates and simplifying the tax code—but there are key differences between the two bills that will have to be worked out before they can be signed by President Trump. Republicans hope that reforming the tax code will lead to a boost in economic growth while lightening the burden taxpayers face.
Lawmakers and tax policy experts debate the likely impact of the tax reforms bills. Supporters believe it will generally benefit taxpayers across the country. But critics warn the plan may mainly benefit the wealthy and large corporations. This is what you should know about the tax reform bills, and what their likely impact on taxpayers could be.
1.) What’s Different Between the Bills
Republicans’ bills are generally headed in the same direction. The main areas of difference between the House and Senate versions are deduction reforms and the number of income tax brackets. Those and other differences will have to resolve eventually if congressional leaders hope to get their tax reform plan passed into law.
“There are some features of the Senate bill that are stronger than the House and vice versa,” Brandon Arnold, the executive vice president at the conservative National Taxpayers Union, told InsideSources. “Hopefully they’ll lean in the direction of good policy. Of course, policy is very important but so too is the politics of the situation, ultimately cobbling together a bill that can make it through both chambers and get to the president’s desk.”
The House bill reduces the seven current income brackets—which determine tax rate based on income level—down to four. The Senate version maintains the current seven income brackets but reduces the rates for most of them. Both bills include an unofficial additional bracket designed to create a zero percent rate for the lowest income earners.
“They’re more similar than they are different,” Hunter Blair, a budget analyst at the liberal Economic Policy Institute, told InsideSources. “There are obviously some differences in rates for individuals and pass-through businesses in the Senate compared to the House. But I think the broad brush of them is similar.”
The Senate version of the bill also differs in that it includes a provision which repeals the individual mandate, a critical component of the Affordable Care Act, better known as Obamacare. The individual mandate is a requirement under the healthcare law that imposes a tax penalty on anyone who isn’t covered by health insurance or a public insurance program like Medicaid. CNN reports that House leadership is hesitant to include that repeal, which could make the legislation much harder to pass.
Additionally, the bills diverge on how they handle education savings plans—with the House plan simplifying and expanding those programs, and the Senate not making any major changes. The House version phases out the estate tax, what’s commonly called the death tax, while the Senate version does not. Both bills immediately increase the threshold, leaving fewer estates eligible.
Both bills include a repatriation fee for offshore profits meant to drive businesses back into the country—but at different rates. Both bills allow businesses to expense new equipment immediately for the next five years, as noted by the Daily Signal. The bills also repeal state and local (SALT) deductions, but the House version leaves property tax deductions at a $10,000 maximum cap.
2.) Bridging the Gap Between Them
Both versions of the bill will have to be identical before they can be passed into law. This requires the House and Senate to form a conference committee together in order to resolve disagreements on the legislation. Once the two chambers pass identical bills, the final language goes to the president for consideration.
“I think it’s going to have to go to a conference committee before the differences between the two bills will be worked out,” Arnold said. “I don’t think there are major differences or tremendously large challenges, but certainly on the state and local deductions and how to deal with the estate tax repeal. There are a few other issues, matching the individual rate structure, there are going to have to be conversations. But I think there’s enough agreement going into these conversations.”
President Donald Trump has been highly supportive of the effort to reform the tax code. Republican leaders promise their bills will create job growth and stimulate the economy—both key goals of the Trump agenda. Prior to the vote in the House, the president met with Republicans for a closed-door meeting to rally support.
3.) The Senate Bill Step Up
Republicans will first have to pass both versions of the bill before they can go into a conference committee together. The House passing its version paves the way for a final push on the Senate side. Majority Leader Mitch McConnell likely had this order in mind when drafting the Senate’s bill.
“I think what Sen. McConnell has done is put something in there for every Republican senator to vote for, to get this passed the Senate,” David Williams, president of the right-leaning Taxpayers Protection Alliance, told InsideSources. “This is not going to be the final bill. What he’s trying to do is get the conservative and moderate Republicans to vote on something so they can go to conference.”
4.) Could See Passage This Year
Republicans have made significant progress toward this principle goal of tax reform, with the House passing its version of the bill Thursday and the Senate advancing their version to the full chamber for a final vote. Now, supporters are holding out hope Republicans can bring it home by the end of this year.
“I think we’re on a good timeline here, everything is moving very quickly, but in a very helpful and productive fashion,” Arnold said. “I think a lot of the difference between the bills are starting to be ironed out, they’re starting to smooth over the edges to come to a unified agreement on how to proceed.”
Congressional leaders turned their full attention to the effort almost immediately after their failure to repeal and replace the Affordable Care Act. Williams notes he was disappointed they started with healthcare but is happy with the progress they’ve made since turning to tax reform.
“I think they can do this by the end of the year,” Williams said. “They’re really pushing it until the end of the year, but I think it’s possible, and I’m hoping probable. What’s interesting is we met with House and Senate leadership, we met with them in the early spring, and they said this was going to happen in the fall. They’ve actually been targeting a pretty good time frame for most of the year.”
5.) The Number of Brackets
One of the more significant differences between the two bills is the number of income brackets: The House version decreases the number of income brackets down to four to simplify the tax code further, while the Senate version maintains the current seven.
“That’s not a major concern from my perspective, the number of brackets doesn’t really add that much in the way of complexity,” Arnold said. “The complexity in the tax code is associated with all the credits, deductions, and loopholes, those provisions are what have to go to make it easier for people to do their taxes each and every year. The number of rates is, in some ways, helpful, in terms, of making sure the distributions of taxation is as fair as possible. That’s a slight tradeoff in complexity, but I don’t think that’s a major area of concern.”
The House version of the bill maintains the current top rate of 39.6 percent. But it increases the income threshold so that not as many taxpayers will fall under the highest rate. The next highest bracket clocks in at 35 percent, followed by a 25 percent rate, and a finally a 12 percent rate.
The Senate version taxes the highest income taxpayers at a slightly lower 38.5 percent, followed by rates of 35 percent, 32.5 percent, 25 percent, 22.5 percent, 12 percent, and finally 10 percent. Both versions include an unofficial zero percent tax rate for the lowest income earners. The bills achieve this by doubling standard deductions in order to eliminate taxes on the first $24,000 earned by a married couple, and $12,000 for individuals.
6.) Reducing Special Carve-Outs
The National Taxpayers Union found in a 2015 study that thanks to the complex tax code, the economy loses $233.8 billion and 6.1 billion hours of productivity annually. Republicans have made tax code simplification a primary goal—which they hope to accomplish by reducing or eliminating certain deductions, credits, and loopholes.
But the two bills take different approaches to the mortgage interest deduction that lets homeowners reduce their taxable income by the amount of interest paid on their mortgage. The Senate bill will continue to allow taxpayers to deduct mortgage debt up to $1 million, while the House version caps it at $500,000.
“The cap is currently set at a million dollars under current law,” National Taxpayers Union executive vice president Brandon Arnold said. “The House version drops that down to $500,000, I think that’s a smart move because the current law incentivizes people to purchase more expensive houses, and the benefits tend to favor those wealthier Americans.”
The two bills also differ on how they handle what is known as state and local (SALT) tax deductions. SALT deductions allow taxpayers who itemize to deduct some of their local taxes on their federal taxes. The Washington Post reports those deductions are limited to $10,000 in the House bill but are completely scrapped in the Senate version.
“That state a local tax deduction, that is a $10,000 property tax cap in the House,” Arnold said. “State and local tax deduction have encouraged state governments to raise taxes while insulating their residents from the full brunt of the additional tax burden because some of that is effectively subsidized by federal taxpayers.”
The House bill also streamlines higher education benefits with the intent of helping families save for education expenses like college tuition. NPR reports that some have warned that the plan would pummel already financially vulnerable graduate students by taxing the currently tax-free tuition waivers they get in exchange for teaching and research.
7.) Creating Economic Growth
Republicans ultimately hope to stimulate economic growth through tax reform. Both bills reduce rates for corporations down to 20 percent. The top rate for corporations, which currently stands at 35 percent, remains one of the highest in the world. House Speaker Paul Ryan has argued the 15-percent corporate cut will spur economic growth, which will stimulate the job market and lead to higher wages for working Americans.
“It’s not perfect by any stretch of the imagination, but we think that passing tax reform by the end of the year will be a boost for the economy, will be great for people, and we’re super excited,” Williams said. “Hopefully by mid-December they’ll have an overall package.”
The Tax Foundation found in an analysis November 3 that the House version of the bill would result in a 3.5 percent boost in economic growth over the long-run. They found in another report the following week that the Senate version would see a slightly greater increase in economic growth at 3.7 percent over the long-run. With overall economic growth lagging since the country was hit by a severe recession a decade ago, the forecasted boost suggests a dawning revival.
But the Wharton Business School at the University of Pennsylvania is less optimistic. Wharton’s analysis predicts economic growth under the House bill at a mere 0.9 percent by 2027, at best. The Senate bill would bring just 0.8 percent in additional economic growth by that time.
“The growth mechanism that they’re relying on really comes from the cuts in the corporate rate, we already have what these cuts in the corporate rate are supposed to engineer, which is high, post-tax corporate profit,” Blair said. “But that hasn’t led to more investment yet, and it doesn’t make much logical sense that it’s going to start by just pushing it a little bit further.”
Wharton’s projection also shows the additional growth rate decreasing by 2040. The House version of the bill, according to the analysis, could only hope to see an additional 0.8 percent in economic growth by that point, due to an increase in debt. The Senate’s would only add a 0.5 percent increase in economic growth, while also risking a negative 0.2 percent drag on economic growth.
8.) The Bipartisan Deficit Concern
Economic growth isn’t all that’s at stake. Lawmakers and tax policy experts on both sides of the issue have expressed concern over how the bills would affect the national deficit. The United States’ running deficit has already added trillions of dollars to the national debt.
“There are definitely ways to get more growth out of these bills,” Arnold, who has regularly testified on fiscal policy during congressional hearings, said. “But the truth is when you cut taxes you get economic growth, but not enough to cover the entire revenue hit, and that’s the case here. But at the same time, our tax code is just inherently broken, it skews economic behavior in insufficient ways, penalizing hardworking Americans, it’s just a mess.”
The Center on Budget and Policy Priorities predicted November 14 that the House version of the bill would increase the deficit by $1.5 trillion over the next decade. Some supporters hope the increased economic growth would bridge the difference, but even the best estimates make that look unlikely. Supporters also look to federal spending cuts to reduce the deficit.
“Economic growth, we think, will come out of tax reform,” Williams said. “But passing tax reform doesn’t mean Republicans can’t pass spending cuts. After this is done, there is no reason why they can’t get together and talk about entitlement reform, discretionary spending, you name it.”
The federal government primarily relies on tax revenue to fund its many expenditures, from the military to social services. Republicans could try to narrow the deficit with spending reductions, but the political risks are significant with so much revenue funneled toward popular programs like entitlements. The Congressional Budget Office found the tax overhaul plan could automatically trigger $25 billion in Medicare cuts if lawmakers don’t find a way to offset the deficit.
“As far as the deficit is concerned, we have seen this play out time and time again, that tax cuts for the rich are then followed by Republican calls to cut spending on Medicaid, Medicare, education, and other programs that working families rely on,” Blair said. “I don’t think that this time is any different.”
9.) The Pass-Through Rate
The House tax bill limits the top tax rate applied to owners of sole proprietorships, partnerships, and S corporations down to 25 percent. Those businesses are known as “pass-through” entities and are often small and family-owned. Their owners and investors are directly taxed on their income, rather than according to the corporate rate. The Senate’s version includes a 17.4 deduction on pass-through income.
“The problem is the vast majority of small businesses are already paying taxes at a top marginal rate that’s lower than the 25 percent cap that the House uses,” Arnold said. “There are a lot of benefits that will go to those smaller businesses just because of things like expanded standard deductions and lower rates and the bracket adjustments, but that capping of the rate doesn’t really impact somewhere in the neighborhood of 90 percent of small businesses. So what the Senate did was create a special deduction for pass-throughs that should benefit a lot more businesses.”
Republicans came to the reduction looking to offer tax relief to small businesses. But not every pass-through business is small and family-owned, prompting concern among critics that the system could be abused by wealthy individuals who want to avoid paying the top personal income tax rate. The bills do promise to include measures designed to prevent abuse, but not everyone is convinced they are enough.
Economic Policy Institute budget analyst Hunter Blair warned it could “turn out to be a really egregious pass-through loophole.”
Manipulations, he believes, are inevitable. “They’ve had to do all sorts of things to try to make it so it won’t be abused by very rich taxpayers, and it’s not clear they have pulled that off, and down the line, taxpayers are going to find ways to gain that system.”
10.) Who Benefits From These Bills
Who benefits under this plan really depends on whom you ask. Supporters argue it will generally help people across the country by lowering rates and boosting economic growth. But critics contest the plan, claiming it will primarily benefit the wealthy and large corporations while doing little to help middle and working-class taxpayers.
“If you scour the provisions of the bill closely enough, you can always find folks that are going to not benefit from this bill as much,” Arnold said. “But at the end of the day you’re moving towards a dramatically flatter, fairer direction when it comes to the tax code, and we’re cutting taxes for the vast majority of Americans. So I don’t think we should get hung up on some of these anecdotal examples the left is trying drum up here.”
Arnold adds that people should focus on the big picture: that the tax reform bills will generally be beneficial for people across the board by helping to increase wages, create more jobs, and reduce rates. But Blair counters that it’s unlikely the plan would help anyone more than wealthy Americans.
“I think that my big takeaway from the bills is that it is overwhelming a tax cut for the rich and big corporations,” Blair said. “At least in the House side, in particular, we know that 30 percent of households in the middle quintile will see their taxes go up.”
11.) The Politics and Lobbyists
Progress in Washington D.C. fights an ever-tightening gridlock, so that passing any major piece of legislation is a daunting task. Plus a long list of special interest groups will defend parts of the current tax code that benefit them, pressuring lawmakers to heed their call. Republicans could be forced to give in on certain provisions just to get tax reform passed. But an imperfect bill—most are—can still be effective.
“That is definitely a concern,” Arnold said, of industry lobbyists’ expectations. “This is a very heavy lift and some industries aren’t going to fair tremendously well because they’re dependent on specific carve-outs in the tax code that might be going away or capped and limited.”
“So sure, the politics of the situation are always a concern. We’re trying to focus people, our membership, and the grassroots in general on the big picture here.”
Democrats and others on the left also vocally oppose the plan. Minority Leader Chuck Schumer leads the charge that the plan would hurt everyday Americans. House Minority Leader Nancy Pelosi declared prior to the House vote that the plan isn’t really tax reform or even a tax cut, but a scam on the American people.
12.) Bringing Businesses Home
The bills promise to help companies better compete in the global economy. American businesses have fallen in international competitiveness since the last major tax reform was installed nearly three decades ago. The Congressional Budget Office found in an analysis that the current tax code, in those thirty years, has lost ground worldwide.
“Cutting the corporate tax is probably going to have the biggest effect on the economy,” said Taxpayers Protection Alliance president David Williams. “People say businesses don’t really pay that 40 percent, but then why are they leaving? If they’re not paying that 40 percent, then why are they going to Ireland, why are they going to Canada? China has a 25 percent corporate tax rate. This is a real problem that businesses are dealing with.”
Republicans hope to win back that global edge by lowering the top tax rate on corporations and small businesses. Employers would find they have more funds to invest back into their businesses and employees. Provisions to disincentivize businesses’ shipping jobs overseas, like the reparation fee, anticipate domestic returns.
“It’s going to bring more money back into this country, with the reparation fee or whatever you want to call it, it’s going to bring more money back into the country, and bring more business back into the country,” Williams said. “That’s going to help workers and also small businesses.”