- Republicans last week released a high-level overview of their tax reform plan.
- The overarching theme is simplification of the tax code.
- Proposals in the outline include decreasing the number of tax brackets, increasing the standard deduction while eliminating most itemized deductions, and reducing the corporate tax rate, among others.
- The legislative process on tax reform has not yet begun, and there are multiple hurdles required to get through Congress.
What’s in the tax reform plan?
The tax reform plan released last week is a high-level overview of what Republican leadership would like to see contained in it. It sets guideposts to start the discussion, and at this point doesn’t get into many policy specifics.
While the President and Congressional Republicans have been largely consistent on the general principles, it is currently unknown what tax reform could ultimately include, and whether it can overcome the many obstacles that lie ahead to get through Congress.
Some proposals in the Republican outline include:
- Decreasing the number of tax brackets.
- Eliminating most itemized deductions, but retaining mortgage interest and charitable deductions specifically. To accomplish this without negatively impacting many individuals, it proposes to increase the standard deduction.
- Retaining benefits that promote work, retirement, and higher education; it leaves open what the specifics may contain.
- Increasing the child tax credit and creating an additional credit for non-child dependents, but removing the personal exemption for dependents.
- Reducing the corporate tax rate.
- Eliminating the Alternative Minimum Tax (AMT).
Specific numbers in this high-level plan are omitted, as these tend to be negotiated throughout the legislative process.
The overarching theme is simplification of the tax code. In doing so, it’s bound to benefit some and not others as the policy fleshes out. That is where tax policy can get particularly thorny and lobbyists vie for retaining carve-outs in the tax code.
What does the road ahead look like for tax reform?
The legislative process on tax reform has yet to begin its long and arduous trek. Many steps are required for this proposal to become law.
Republican-led Congress must first pass a budget resolution including instructions for writing a reconciliation bill to address tax reform. This is because Republicans are using budget reconciliation as the vehicle for reforming the tax code, allowing them to pass legislation with a simple majority without the 60 votes needed to overcome a filibuster in the Senate (Republicans hold 52 of the 100 Senate seats).
Republicans must also resolve the party’s disagreement on whether to have these instructions include Affordable Care Act repeal and replace. When using reconciliation, you can use it only once a year for a single bill that addresses revenue. This means that both issues would need to be resolved at the same time in one bill, which could potentially hurt tax reform efforts.
The reconciliation legislation would next need to be drafted by the various committees impacted. This is where we will begin to see the specifics of policy intent and assess the potential impact of the proposal. If it follows regular order, the legislation would typically start in the House. There would be hearings and mark-ups, which could change the bill completely. If the House were to pass a bill, it would move to the Senate, where they would go through the same process.
Before a vote can take place, the Congressional Budget Office (CBO) must complete its required analysis of the economic impacts, including cost and estimates of other pertinent effects. The Senate needs the score for passing legislation under budget reconciliation rules, further complicating what the Senate can change in the House bill. Under reconciliation rules, the Senate bill must achieve at least as much savings as the House bill. If the tax reform bill adds to the deficit over the long term, some changes would sunset and the tax code would return to previous structure, absent further legislative action.
Under Senate rules, items ancillary to the budget are not to be included. This is where the Senate Parliamentarian Elizabeth MacDonough comes into play, who opines on items contained in the bill that do not meet budget reconciliation requirements. Reconciliation bills are limited to items that directly impact the federal government budget either in spending, revenue, or debt limit. Accordingly, items that are not directly related to the federal outlays may not meet that test and may need bipartisan support to get the 60 votes under regular order (with 52 Republican Senators, eight Democrats would be needed).
The version of the bill that passes the Senate must be reconciled with the version that passes the House, if there are any differences between the bills. For tax reform to become law, both the Senate and the House must pass the same bill and the President must sign it.
Business owners watching tax reform closely
Businesses of all sizes are looking to President Trump to make good on his campaign promise to create a more business-friendly environment. A recent Paychex Small Business Survey of U.S. companies with less than 500 employees found that 41 percent of respondents want the government to put tax reform at the top spot on its to-do list – and most (40 percent) simply want to see a lower tax rate. With a high-level plan released last week, the President and Congressional Republicans have reaffirmed where their priority now lies. It’s likely that government actions will receive intense scrutiny by the U.S. business sector over the coming months.
Tax reform faces a long road ahead
Many decisions need to be made regarding policy priorities. In general, the tax code is typically used to encourage or curb behavior. The decisions on how to accomplish this fairly while streamlining the code itself are particularly complex to navigate. We will continue to watch for any developments as the plan begins its journey through Congress.
About the Author
Laurie Savage, Paychex, Inc., CCEP
Laurie Savage is a compliance professional and subject matter expert on the Affordable Care Act (ACA) for Paychex Inc. Specializing in Health Care Reform at both the state and federal level, since 2007, she has helped Paychex assess the regulatory and legislative implications that affect their clientele. Additionally, Laurie has also been called upon to research and vet due diligence efforts for both domestic and international opportunities for her organization. For over 13 years, Laurie has focused on compliance and risk management principles while ensuring her company meets industry standards.
Laurie holds a master’s degree in Labor and Policy Studies from the State University of New York and an undergraduate degree in Commerce from Queen’s University in Canada.
About the Paychex Small Business Survey
The Paychex Small Business survey was administered by Bredin, a third-party research firm specializing in small business. The survey was conducted online between August 18, 2017 and August 24, 2017 and polled 341 principals of U.S. companies with 1-500 employees. The group surveyed was not exclusively Paychex clients, but included other small business owners to provide a full view of the small business landscape.