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On Tuesday, July 24, 2018, House Ways & Means Committee Chairman, Kevin Brady, released the “House GOP Listening Session Framework” for “Tax Reform 2.0.” The Framework provides a brief outline of how the Committee believes Congress should further amend the Tax Code, including:
- Improving the ability for families to save for retirement (though there isn’t any detail on how, exactly, this would actually be accomplished).
- Expanding the potential tax-free uses of 529 college saving accounts to include additional expenses, such as costs related to home schooling student debt, and apprenticeship fees to learn a trade.
- Creating something the document strangely calls “New Baby savings”, which seems like a bit of a misnomer for what’s really being suggested. The proposal actually calls for eliminating certain penalties on retirement account distributions, making it more attractive to raid one’s savings as opposed to adding to it.
- Establishing Universal Savings Accounts (USAs) to allow tax-favored savings for a broad range of potential expenses.
- Allowing start-up businesses to deduct more of their initial start-up costs.
While all of the above changes could have an impact on your future tax bill, the Framework also calls for an additional change that would impact just about everyone; making the individual and pass-through (small) business tax cuts enacted as part of the Tax Cuts and Jobs Act (TCJA) last December permanent.
The Tax Cuts and Jobs Act’s Legislative Journey
As you might recall, even though the Tax Cuts and Jobs Act was a monstrous rewrite of the Tax Code and brought with it easily the most significant changes to the tax law in more than three decades, the bill wasn’t passed using the traditional, “regular order” procedures of the Senate.
When the Senate is operating under regular order, it takes 60 votes in order to avoid a bill-killing filibuster. With respect to the Tax Cuts and jobs act, Democratic senators made sure that wasn’t an option, firmly uniting against the bill. Instead of working with their counterparts across the aisle to arrive at a bill with more bipartisan support (if such a thing even exists anymore), GOP senators chose another option… the Senate road less traveled; a legislative process known as “reconciliation”.
The legislative process, known as reconciliation, was created back in 1974 as part of the Congressional Budget Act as way of – hold on to your seats for this one – making it easier for Congress to pass the spending/tax bills necessary to lower (yes, that’s right… lower) the deficit and conform to budget resolutions. It can prevent a filibuster and allow the Senate majority to pass a bill with only 51 votes, but these special rules come with a lot of strings attached.
One key feature of reconciliation bills is that they may not increase the federal deficit outside of the 10-year budget window. For years Republicans have preached fiscal responsibility and reigning in the deficit. But when push came to shove, and the Tax Cuts and Jobs Act was laid before them, the deficit hawks were nowhere to be found. Instead, the GOP passed a bill that the non-partisan Congressional Budget Office estimated would increase the deficit over the next decade by nearly $1.5 trillion!
So how do you stop a deficit like that from continuing to balloon beyond the 10-year budget window and comply with the rules for reconciliation? One simple way is to cut out tax breaks that “cost” the government money, which is the route that the GOP chose to go. They could have, potentially, eliminated some of the big corporate tax breaks and kept many of the breaks for individuals, but that’s not the route they chose. Instead, the Tax Cuts and Jobs Act calls for permanent (note that “permanent” in D.C. speak doesn’t actually mean forever – it just means until they pass something else to supersede it) breaks for big business, but an end to most of the tax breaks for individuals and small businesses by 2026.
What If Republicans Can’t Get Tax Reform 2.0 Enacted?
No one knows what the future will hold, but history tells us that the Democrats have a good chance of taking back enough seats in the House to regain control. Recent polls also show continued weak support for President Trump, which could further complicate things for some Republicans in more moderate states (though President Trump has certainly proved pollsters wrong in the past).
So now ask yourself this… what if Republicans don’t get Tax Reform 2.0 through before the new Congress steps in . And what if the Democrats take back control of the House, rendering moot the possibility of another reconciliation bill? And what if Republicans never have control over both Houses of Congress and the White House before the December 31, 2025 expiration of the current tax rates for individuals and small businesses?
Should this happen, the GOP’s deal with the devil – reconciliation and the sunset of individual and small business tax breaks - may come back to haunt them . Think about it through the political lens by which everything is viewed these days; how bad would it look for Republicans if 2026 rolls around and big corporations are still reaping the benefits of permanent tax breaks on the backs of “mom and pop”? The optics would be awful and it could be a political nightmare. Democrats would be in the driver’s seat to force big changes in exchange for renewing certain tax breaks, even if they don’t have full control.
Maybe that leads to dramatically higher tax rates – much higher than would be for those with ultra-high income so that tax breaks can be preserved for those in the much-discussed “middle class.” Perhaps it means dramatic reductions in the amounts that can pass free of estate tax from one generation to the next, a goal long espoused by many on the left. Could it even become a bargaining chip for healthcare reform? Who knows?
With so much on the line, even though “Tax Reform 2.0” is not likely to have near the same impact as the Tax Cuts and Jobs Act – a.k.a. Tax Reform 1.0 – its importance to future tax policy cannot be overstated.
