Update: On Thursday, Nov. 16, the U.S. House of Representatives passed its version of the federal tax overhaul. The legislation, referred to as the Tax Cuts and Jobs Act, passed the House in a party line vote of 227 to 205, with 13 Republicans joining all Democrats to vote against the legislation. All but one of the Republicans opposing the bill came from 3 states: New York, New Jersey, and California. These high-tax states would be negatively impacted by the repeal of the deduction for State and Local Tax (SALT) contained in different variations in the House and the Senate bill.
Now the attention returns to the Senate to see how it proceeds in the weeks to come on its iteration of tax reform.
- The bill is in its initial form and will likely undergo significant debate and revisions.
- Key features include reduction of the corporate tax rate to 20 percent; lowering tax rate for pass-through entities to 25 percent; changing business-related exclusions, deductions, and tax credits; eliminating the Alternative Minimum Tax; and reducing number of individual tax brackets from seven to four.
- Senate will likely release its version of tax reform legislation in the coming weeks.
Republicans pushing to get bill passed quickly
On Nov. 2, 2017, Republicans in the U.S. House of Representatives released legislation to overhaul the federal tax code. The House Ways and Means Committee bill, referred to as the Tax Cuts and Jobs Act, followed the general framework released in September, with cuts to tax rates and changes to certain tax deductions. The Ways and Means Committee should begin the review and markup of the bill next week.
The budget vote passed narrowly in the House with a vote of 216 to 212. Twenty Republicans sided with all Democrats in voting against the legislation.
The Senate will likely release its version of tax reform legislation in the coming weeks. Although that chamber's leaders seek to introduce, debate, and pass the bill in the full Congress by the end of November, the process may extend much further, as lawmakers have not resolved disagreements. Lobbyists will vie to make their cases to legislators, as the bill will have heavy impacts on various constituencies.
Because Congress is applying the budget reconciliation process, the bill requires a simple majority of 51 votes to pass. Budget reconciliation is a complex procedure in the Senate, and limits the legislation to provisions that directly involves items impacting the budget.
The bill is in its initial form and will likely undergo significant debate and revisions. As it stands now, the tax system overhaul would:
- Reduce the corporate tax rate to 20 percent.
- Lower the rate for pass-through entities (such as S-corporations and partnerships) to 25 percent for business income (limitations apply).
- Make changes to business-related exclusions, deductions, and tax credits, including tip credit modification and repeal of the Work Opportunity Tax Credit.
- Repeal the exclusions of various employer fringe-benefit programs, such as employee achievement awards, dependent-care assistance programs, moving expense reimbursements, and adoption assistance programs.
- Eliminate the Alternative Minimum Tax.
- Decrease the number of individual tax brackets from seven to four: 12 percent, 25 percent, 35 percent, and 39.6 percent.
- Preserve current tax rules for retirement savings accounts, such as 401(k) plans and individual retirement accounts.
- Eliminate deductions, including the elimination individual deduction for qualified medical expenses and state and local income tax deductions.
- Reduce certain itemized deductions such as imposing a cap mortgage interest and property tax.
- Almost double the standard deduction to cushion the blow to individuals from the decrease in itemized deductions.
- Repeal the deduction for personal exemption, making family size less of a factor in taxable income.
- Increase the child tax credit to $1,600 and create an additional $300 credit for non-child dependents. Additionally, it increases the income level where the credit is phased out.
Some tax-reform ideas left out — for now
Legislators omitted some controversial tax-reform ideas from this version, including:
- Strategies to broaden the tax base, such as changes to the 401(k) retirement plan benefit and limits on the exclusion of employer-sponsored insurance; and
- Repeal of the Affordable Care Act's individual mandate to carry health insurance.
Nevertheless, these items may not be off the legislative table. Lawmakers may add them as the bill makes its long journey through Congress.
Tax reform bill in flux as it makes its way through Congress
Paychex will continue to assess this complex and lengthy legislation, and we'll provide detailed analysis as it moves through committee. Given the bill's considerable political and practical ramifications, it is unlikely to survive in its current form. Its current shape is likely a starting point for further debate.