The US House of Representatives passed a version of tax reform this month. The Senate is now working on their version which will also be met with much, if not more, scrutiny. The House's plan is to shrinks the number of tax brackets from seven to four. The lowest rate would rise from 10% to 12% and the top rate would remain at 39.6%. In contrast, the Senate wants to lower the top rate from 39.6% to 38.5% and leave the lowest bracket unchanged.
Both versions intend to increase standard deductions. The House wants $12,000 for single filers and $24,000 for joint filers. The amounts are slightly higher in the Senate's version, but not by much. Both branches intend to get rid of the personal exemption (currently $4,150 in 2018). The House's plan removes the additional deduction for the blind and elderly. Both plans intend to increase the child tax credit modestly with changes to the income qualifications.
Perhaps the most controversial part of the House and Senate plans are centered around reducing or eliminating itemized deductions. The House bill caps deductions for property taxes and eliminate deductions for state and local income taxes. Taxpayers in New York, California, Oregon, Minnesota and Hawaii appear to be the biggest losers if this change is adopted. The SALT (state and local tax) deductions benefits high earners or those who itemize their deductions which is approximately 44 million Americans as of 2013.
A big win for high income earners is the repeal of the Alternative Minimum Tax. Both the House and Senate versions would scrap this additional tax. Headlines lead with the overhaul of corporate taxation. The House has presented a maximum pass-through rate of 25% down from the current 39.6%. The Senate's proposal is even less at 17.4%. Both versions are huge wins for the nation's 8.5 million C corporations, S corporations and partnerships.
The changes in corporate rates appear to be the crux of both plans. The potential benefits of this strategy reinvigorates the debate of trickle-down economics and whether or not the "money saved" actually ends up in the hands of the middle class. Will a corporate tax cut really spur economic growth? Will it grow jobs, wages and bring manufacturing back to the US from overseas?
If the current House vs Senate battle sounds familiar, it should. Back in May of this year, the President and House members celebrated with elaborate fanfare the passing of a Measure to Repeal and Replace the Affordable Care Act. This bill was dead in the water a few months later and did not even get a vote due to the lack of partisan support.
The next big hurdle for tax reform will be getting through the Senate's budget rule, not impossible, but a tall order nonetheless. Some of the tools used to get through this cumbersome process includes using sunsets, splitting the bill into multiple bills or in classic dramatic political fashion - the nuclear option (passing with 51 votes instead of 60).
Need a refresher on how a bill becomes law? This cartoon never gets old, and it'll be stuck in your head for days, you're welcome!
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