Tax Reform 2.0: The Ways and Means Tax Proposals

Tax Reform 2.0: The Ways and Means Tax Proposals

Updated October 4, 2018
Tax Reform 2.0: The Ways and Means Tax Proposals
The Ways and Means Committee, on September 13, 2018,
The revenue estimates for H.R. 6760 discussed below are
approved three tax bills. H.R. 6760, the Protecting Family
for FY2019-FY2028, but as they generally reflect
and Small Business Tax Cuts Act of 2018, would make the
extensions after 2025, are estimates for a three-year effect.
individual tax cuts in the 2017 tax revision (commonly
referred to as the Tax Cuts and Jobs Act) permanent. H.R.
Rate Reductions and Structural Changes
6757, the Family Savings Act of 2018, would expand tax
These provisions included the new rate structure that
benefits for savings and make other modifications to
featured slightly lower tax rates, the increase in the standard
retirement plans. H.R. 6756, the American Innovation Act
deduction and child and dependent credits, and the repeal of
of 2018, would provide tax benefits for start-up businesses.
personal exemptions. The new rates were slightly lower
The last two bills were approved in the House on
with the top rate reduced from 39.6% to 37%. The rate
September 27, 2018, and the first on September 28, 2018.
reductions were projected to cost $522 billion. The
increased standard deduction generally offset the loss of
Making the Individual Tax Cuts
personal exemptions for taxpayers, and the increased child
Permanent, H.R. 6760
tax credits generally offset the loss of dependent exemption,
The most significant bill, measured by budgetary impact,
for a small combined loss of slightly over $20 billion.
would make the expiring provisions relating to individual
tax revisions, including the deduction for pass-through
The $10,000 SALT Cap and Other Restrictions on
businesses taxed under the individual tax, permanent. These
Deductions and Exclusions
provisions are explained in CRS Report R45092, The 2017
The original bill temporarily eliminated some itemized
Tax Revision (P.L. 115-97): Comparison to 2017 Tax Law,
deductions and restricted others. The most significant of
coordinated by Molly F. Sherlock and Donald J. Marples.
these in revenue terms was a $10,000 cap on the amount of
state and local taxes that could be deducted. There was also
When the 2017 tax revision was adopted, a number of
a lower $750,000 cap on mortgage debt eligible for interest
provisions in the bill were enacted on a temporary basis. If
deductions and an elimination of interest deductions for
those provisions had been enacted on a permanent basis, the
certain home equity loans, elimination of most casualty loss
cost would have exceed the $1.5 trillion cost allowed under
deductions and miscellaneous expenses, an increase in the
reconciliation in the Senate. Provisions relating to
income limit on charitable deductions, and a repeal of the
corporations, the international tax system, and a variety of
overall limit on itemized deductions. These provisions
provisions relating to business deductions were enacted on
together would gain $318 billion in revenue if made
a permanent basis, whereas most of the provisions relating
permanent.
to individuals are set to expire after 2025.
The bill would also make permanent the inclusion of
The Joint Committee on Taxation estimated that making
employer provided moving expenses in income ($2 billion)
these provisions permanent would cost $631 billion for
and repeal the deduction for moving expenses ($3 billion),
FY2019-FY2028. Since the costs largely occur in the last
except for members of the Armed Forces. It would
three years, the cost would be significantly larger in the
permanently repeal the exclusion for employer-provided
future. If the cost grows by 5% a year, over the following
bicycle commuter fringe benefits and limit the deduction of
10 years (FY2029-FY2038), it will increase the deficit by
wagering losses, at a negligible revenue cost.
$4 trillion, not including interest costs.
H.R. 6760 would extend a reduction in the floor for
There are four major elements of the individual provisions
itemized deductions for medical expenses, expiring in 2018,
in the 2017 tax revision that are made permanent by H.R.
for two years, at a cost of $3.9 billion.
6760: (1) the rate reductions and other structural changes,
(2) the limits on deductions including the $10,000 cap on
The Deduction for Pass-through Businesses and
itemized deductions for state and local taxes (SALT), (3)
Limitation on Losses
the deduction for pass-through businesses taxed under the
Businesses taxed under the individual rather than corporate
individual tax along with a limitation on their loss
tax, including sole proprietorships, partnerships, and
deductions, and (4) the increased exemption for the
Subchapter S corporations that elect to be taxed on a
alternative minimum tax. There are also some other
partnership basis were allowed a deduction of 20% of
provisions including an increase in the exemption for the
qualified pass-through income. For high-income
estate tax.
individuals, the deduction is limited to the greater of 50%
of wages paid, or 25% of wages paid plus 2.5% of
depreciable property. Certain service businesses are not
eligible for high-income individuals. Making the pass-
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Tax Reform 2.0: The Ways and Means Tax Proposals
through deduction permanent is projected to cost $179
rules, clarifying the treatment of certain contributions that
billion.
are picked up by government employers, and allowing
elective deferrals by members of the Ready Reserve of the
Another provision, a limit on the deduction of losses for
Armed Forces.
noncorporate businesses in excess of $500,000 for a joint
return and $250,000 for a single return, would raise $72
These changes would cost $10 billion for FY2019-FY2028,
billion.
with almost $4 billion associated with the multi-employer
plans and slightly over $6 billion with the exemption from
Alternative Minimum Tax Exemption
minimum distribution rules by those with $50,000 or less in
The exemption for the alternative minimum tax (imposed at
account value.
a lower rate on a broader base) is increased from $86,200
(for 2018) to $109,400 for a couple and from $55,400 to
Administrative Rules
$70,300 for a single or head of household taxpayer, and is
This section has three provisions: (1) it allows due dates for
phased out at higher income levels, for a loss of $283
establishment of plans on the tax filing day rather than year
billion.
end; (2) it modifies the anti-discrimination rules so they are
not triggered by participation in the plan of older, longer-
Estate Tax Exemption
service employees; and (3) it commissions a study of
The doubling of the exemption from the estate tax is made
premiums for the Pension Benefit Guaranty Corporation
permanent at a cost of $29 billion. The exemption is
(PBGC).
$11,180,000 for 2018 and is indexed for inflation.
Other Savings Provisions
Other Provisions
This section has three proposals. It introduces general
Several provisions have a very small cost. Capital gains tax
universal savings accounts with a $2,500 contribution limit
rates are tied to prior-law rate brackets. The proposal links
that are separate from other accounts, and whose
the 0% bracket to the new 12% and below bracket. The cost
distributions are not subject to tax. It expands the uses for
is less than $50 million a year. The bill also extends
tax-free distribution from section 529 education savings
benefits for ABLE accounts, the combat zone exclusion of
plans to certain apprenticeship programs, home schooling
individuals serving in the Sinai Peninsula, and the treatment
costs, up to $10,000 in repayment of student loans, and
of student loans discharged on account of death or
expenses for elementary and secondary education,
disability, all at a negligible cost.
including parochial schools. It allows penalty-free
withdrawals of up to $7,500 from retirement plans in the
The Family Savings Act of 2018, H.R.
case of birth or adoption.
6757
This proposal has three major sections: (1) employer-
These provisions are estimated to cost $11 billion from
sponsored pension and retirement plans, (2) administrative
FY2019-FY2028, with almost $9 billion associated with
provisions, and (3) other savings provisions. Overall, the
universal savings accounts and $2 billion with the penalty-
proposal is estimated to cost $21 billion from FY2019-
free retirement distributions for new births and adoptions.
FY2028.
The American Innovation Act, H.R.
Rule Changes in Retirement Plans
6756http://www.congress.gov/cgi-
This section provides a series of rule revisions:
lis/bdquery/z?d115:H.R.6756:
simplifications to benefit multi-employer plans, removing a
This proposal would increase the amount of start-up costs
cap on increases in auto-enrollment retirement plans,
that can be deducted immediately from $5,000 to $20,000.
eliminating certain notification requirements and allowing
The deduction would be phased out dollar for dollar after
more plan amendments, treating taxable non-tuition
start-up costs exceed $120,000 (up from $50,000 in current
fellowships and stipends as compensation for IRAs (IRA
law). The proposal would also allow net operating losses
contributions cannot exceed compensation), repealing the
and unused tax credits arising within three years of start up
prohibition on IRA contributions by those 70½ and older,
to be carried over to a new owner that continues the
prohibiting plans from making loans through credit cards
business, without regard to the general rules that restrict
and similar arrangements, allowing the transfer of lifetime
these carryovers.
income investments (annuities) between plans or as a
distribution if no longer allowed as an investment option in
The Joint Committee on Taxation has estimated a revenue
a plan, allowing custodial accounts on termination of
loss of $5.4 billion over FY2019-FY2028.
certain plans (Section 403 plans) to be converted into IRAs,
clarifying what individuals will be covered by church
Jane G. Gravelle, Senior Specialist in Economic Policy
controlled organization plans, exempting individuals with
accounts of $50,000 or less from minimum distribution
IF10977

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Tax Reform 2.0: The Ways and Means Tax Proposals

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