GOP leaders have a broad plan to cut tax rates and simplify the code, but they’re hoping that the tax-writing committees can fill in the thorny details.
Top Senate, House, and administration officials released their nine-page plan for overhauling the tax code Wednesday. The document, called the Unified Framework for Fixing Our Broken Tax Code, will serve as a guidepost for House and Senate tax writers to craft their own tax legislation, which they hope to pass by the end of the year.
The framework offers the most detail on agreements between the tax-writing principals so far, but leaves much open to interpretation by the Senate Finance Committee and the House Ways and Means Committee, particularly in how to pay for the sweeping business and individual tax cuts proposed in the document.
GOP leadership and tax writers briefed House Republicans on the tax plan in a half-day retreat, breaking off into working groups for business and individual taxes. Rep. Peter Roskam, chairman of the Ways and Means subcommittee on tax policy, said a markup on a tax bill may come as soon as October.
The framework creates a 25 percent tax rate for businesses that pass their profits to the owners, such as partnerships and S corporations. They’re currently taxed at the individual rate, which can be as high as 39.6 percent. Critics have said the move would allow wealthy professionals, including doctors and lawyers, to reclassify their wages as business income to capture the lower rate. The framework leaves it to the committees to craft guardrails to prevent abuse.
“What we propose is for pass-throughs, that the income within the pass-through entity be separated out, business income and compensation, and that business income will be taxed at the lower 25 percent and the compensation will be taxed at the individual rate,” Roskam said.
Roskam said the committee’s technical staff was working to come up with a “reasonable definition” of compensation.
The proposal collapses the seven tax brackets into three, at 12 percent, 25 percent, and 35 percent, but leaves open the possibility of a fourth tax bracket to prevent the plan from shifting the tax burden toward lower- and middle-income taxpayers. It’s another revenue-raising provision that’s left to the committees, and it’s unclear what the new rate could be. Earlier this year, former White House adviser Steve Bannon pushed for a tax rate of 44 percent for those who earn more than $5 million per year.
In the House’s tax-reform blueprint released in mid-2016, lawmakers set out to eliminate the ability for companies to deduct the interest paid on loans, raising about $1 trillion over a decade. The move could impact real estate, agriculture, and other businesses which use financing for much of their business operations. The new framework dials that proposal back, partially limiting the tax break, but the extent to which lawmakers will reduce the tax break is left for later.
“We’re going to lay that out in the chairman’s mark,” House Ways and Means Committee Chairman Kevin Brady told reporters.
That could lead to a lobbying bonanza in which interest groups push for carve-outs for their industries. More than 30 agriculture groups sent a letter to lawmakers in June opposing eliminating the interest tax break.
The framework also leaves out a revenue-raising provision favored by President Trump: eliminating the ability for investment managers to treat their income as capital gains, allowing it to be a taxed at a lower rate. Its absence signals that there may be no consensus between the White House and Capitol Hill on the issue.
The Committee for a Responsible Federal Budget, a fiscal watchdog group, said the new tax framework could cost $2.2 trillion over a decade when factoring expenses and new revenue. That’s more than the $1.5 trillion that Senate budget writers have likely carved out for a tax bill in their fiscal 2018 proposal.
Ray Beeman, a tax expert at Ernst & Young and former House Ways and Means Committee staff member, said the framework suggests that Republican officials have worked out firmer positions in some areas than others.
The lack of offsets is likely intentional, Beeman said. Beeman helped develop the last tax-reform proposal—Rep. Dave Camp’s unsuccessful 2014 tax bill, which contained a number of potential pay-fors that today’s tax writers may use. Beeman said the lawmakers are likely trying not to dangle potential offsets to the public while excluding others, sowing confusion.
“I think the committees know what offsets they want to look at; you don’t need them in the framework,” he said.
Reaction among business groups was largely positive, albeit with hesitation over protecting their preferred tax breaks. The National Association of Home Builders praised the new pass-through rate, which may benefit contractors and real estate agents, and the preservation of the mortgage-interest deduction, but showed concern about the plan to double the standard deduction.
“On an issue of such significance, we recognize difficult trade-offs must be made,” NAHB Chairman Granger MacDonald said in a statement. “Although the mortgage-interest deduction remains untouched, its effectiveness could be diminished as more families elect to take a higher standard deduction.”
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