November 07, 2017
With more than 30 years of experience in federal legislative and regulatory affairs, Jim O’Connell focuses on HR and PAYROLL POLICY ISSUES, keeping customers informed about fast-changing and complex compliance regulations and workforce trends. Follow him on Twitter JOCWashDC
On Nov. 2, the U.S. House of Representatives Committee on Ways and Means introduced H.R. 1, the Tax Cuts & Jobs Act of 2017 (TCJA), sweeping tax reform legislation that would sharply reduce individual and business taxes and broaden the tax base by abolishing or curtailing certain longstanding tax breaks.
The Wall Street Journal reported that the bill would be “the biggest transformation of the U.S. tax code in more than 30 years.”
The committee plans to begin formal consideration of the measure as early as Monday, Nov. 6, voting for and against amendments offered by committee members. Lawmakers hope to report a bill favorably out of committee by mid-November, setting up a vote in the House of Representatives before Thanksgiving. The House-passed bill would then be referred to the U.S. Senate, where a similar legislative process would unfold into December.
Ways and Means Committee Chair Rep. Kevin Brady (R-TX) expects that a final tax reform bill would be approved by the House and Senate and on President Trump’s desk before the end of the year, with most tax cuts taking effect January 2018.
As dramatic as the Nov. 2 bill announcement is, it represents only a first step in what promises to be a contentious legislative process. The measure may be changed in the Ways and Means Committee, on the House floor, in the Senate Finance Committee, on the Senate floor or in the all-important House-Senate conference committee, where the real tax reform decisions will be made—and final deals cut.
Of perhaps greatest interest to employers and workers alike, the proposed overhaul leaves completely untouched the present law tax treatment of employer-sponsored health and retirement benefits. The bill does not clip the tax exclusion for employer health coverage premiums, the largest single revenue loser in the tax code at $165 billion in 2017 alone, according to the congressional Joint Committee on Taxation.
Likewise, and contrary to earlier reports, H.R. 1 would not change the present law pre-tax deduction for employee savings in 401(k) and similar employer-sponsored retirement plans, the second most expensive tax expenditure.
To be sure, either or both of these two potential revenue-raising bonanzas could be targeted in subsequent rounds of amendments, especially in competition with other tax breaks that were abolished or curtailed in this proposal. Lobbyists for interests hurt by the proposed bill can be counted upon to suggest other tax breaks to substitute for theirs.
The Tax Cuts & Jobs Act of 2017 would compress existing law tax rates and brackets from seven to four, with rates going forward of 12%, 25%, 35% and the existing 39.6% rate. The 12% bracket would apply to taxable incomes up to $90,000 for joint filers, while the 25% rate would apply to incomes between $90,000 and $260,000. The Ways and Means Committee estimates that a typical family earning the median household income of $59,000 would receive a tax break of $1,182 per year.
Since these tax rate cuts would be effective Jan. 1, 2018 assuming a tax reform bill is signed into law this year, the IRS would need to update tax withholding tables right away so payroll systems would be able to timely withhold the correct taxes as soon as possible in January. This could prove to be a big challenge – and big headache – for some HCM systems.
Among other good news, the proposed bill would also double the standard deduction to $12,000 for individuals and $24,000 for married couples, meaning that over 90& of tax filers would not itemize their deductions. This would be one of the biggest strides toward tax simplification ever.
For businesses, the corporate tax rate would be slashed from 35% to 20%. The committee says that today’s corporate tax rate is “the highest in the industrialized world.” The cut to 20% would be the largest reduction in the U.S. corporate tax rate in history.
While employee health and retirement benefits escaped unscathed, other tax preferences were not so lucky. The deduction for mortgage interest was cut back substantially, from the present law $1 million in acquisition indebtedness to only $500,000, and then only for mortgages related to a principal residence.
The state and local tax deduction (SALT) was also curtailed. The new bill proposes to completely abolish the deduction for state and local government income taxes paid, and allow a deduction for state and local property taxes paid, but only up to $10,000 a year.
Among other cancellations of tax breaks, the Work Opportunity Tax Credit (WOTC), that allows employers to take a tax credit for up to 40% of first year wages paid to certain target groups like food stamp recipients, would be repealed.
As the previous blog in this series pointed out, tax reform must include “pay-fors” to offset the gigantic revenue hits the U.S. Treasury will take for big individual and business tax cuts. The alternative would be irresponsible, of course, to simply pass the cost of tax cuts on to future generations in the form of a much larger public debt, already approaching $20 trillion.
With an actual tax reform legislative package now on the table at over 400 pages, the real fun begins. The House Ways and Means Committee is expected to begin “mark-up,” or amendments and votes in committee, on Nov. 6 and continue probably all week. This legislation is clearly on a fast-track to go to the House floor for final votes before Thanksgiving.
Following the House vote, presumably to approve a bill, all eyes will turn to the U.S. Senate, which will develop its own tax reform overhaul and conduct votes in committee, probably right after Thanksgiving. The next step would be to report the bill to the full U.S. Senate, which could vote sometime in early- to mid-December.
As Republicans learned painfully in the Obamacare repeal and replace effort, under special reconciliation parliamentary procedures, Republicans, who hold a 52-48 Senate majority, can pass tax reform legislation with only Republican votes. But they must hold at least 50 of those Republican votes, with Vice President Pence breaking any tie. Democrats are not expected to vote for tax reform.
Thus, the real test of tax reform 2017 will not be in the House, where passage is assured, but in the Senate, where skeptical Republican moderates could have problems with the tax reform bill, as they did with ACA repeal.
When and if a tax reform measure clears the Senate, the next battle will take place in the House-Senate conference to reconcile differences in the bills passed by each chamber. Supporters hope they can conclude a final bill and send it to the president’s desk before year-end.
Enacting into law “the biggest transformation of the U.S. tax code in 30 years,” to use the Wall Street Journal’s characterization, especially in only two months, will be a Herculean task.
Whether President Trump gets to claim a tax cut victory will not depend at all on the big tax cuts for individuals and businesses – tax reform’s clear “winners.” Rather, it will be tax reform’s “losers,” those sectors of the economy like home builders, realtors and state and local governments, whose cherished tax breaks and deductions are repealed to pay for tax cuts, that can stand in the way of success.
Employers will be watching closely as the House Ways and Means Committee, the full House of Representatives, the Senate Finance Committee, the full U.S. Senate and a possible House-Senate conference committee take decisive steps toward tax reform 2017. The key issue will come down to winners and losers and, for employers, whether existing tax breaks for employer-sponsored health and retirement benefits are preserved.