The Duffey Law Firm Blog

Monday, December 4, 2017

Trump Tax Reform Update #6

Readers of our updates will recall that months ago we predicted the Republican congress would likely use reconciliation to pass tax reform/tax cuts. Clearly the recent senate budget vote sets up precisely this scenario. In late September, the senate agreed on draft a budget that would allow for $1.5 million in tax cuts over the next decade. Ways & Means Chairman, Kevin Brady (R-Tx) said he will release the text of a tax bill as soon as the budget is "signed, sealed and delivered." It is widely expected that a mark-up will soon follow.

This week the financial markets had a sudden and dramatic drop, largely attributed to rumors that the new tax reform bill would limit or eliminate current tax deferral on contributions to 401K plans. Pundits quickly explained that this was being considered as an accounting play - meaning shifting when taxes are to be paid without increasing the amount of tax paid. The concept was to lower the limit on contributions to 401K's while correspondingly increasing the limits on contributions to Roth IRA's. With a 401K, no income tax is paid at the time of contribution, but at the time the taxpayer withdraws money from his 401K he pays tax. With a Roth IRA, the taxpayer makes tax payments at the time of the contributions, then pays no tax at the time of withdrawal. Thus shifting contributions from tax deferral plans, to initial tax payment with no tax due at later times of withdrawal may have assisted the tax reformers with ultimately arriving at a solution to the revenue neutral objective of reconciliation.

As we discussed in our prior updates, reconciliation rules prohibit adding to the deficit outside the decade long time frame. This means we could see a 10 year sunset on the tax legislation as we did with the George Bush tax reform (the last "reform" which supposedly "eliminated" the estate tax). As we saw with the Bush tax reform, the estate tax was repealed and reinstituted in the same year.

The Republicans are using reconciliation as a legislative process in order to pass tax reform without the Democrats in the senate. Currently, the Trump administration is shooting for a bill to sign before the end of this year.

One big hurdle to the proposal being discussed behind closed doors is the elimination of the federal income tax deductions of state and local taxes. Proponents of this elimination of deductions say "Why should the citizens of states like Florida subsidize the high tax states like New York, New Jersey and California."Of course politically, there is the reality of dealing with powerful senators and congressman from states that would be adversely impacted by the loss of those federal tax deductions.

Another argument regarding the federal deduction of state and local taxes’ is that such a deductions largely benefit the wealthy. Why? Because approximately 75% of income earners do not file itemized tax returns. Typically, only the top 25% of earners who can take advantage of itemized deductions file returns which allow for the deduction of state and local taxes.

The Democrats have focused their opposition to the tax bill as a giveaway to the "top 1%" and a big deficit spending bill. Ron Wyden (D-OR) said: "We've laid out our principals. It's all about the middle class not the top of the top. It not about creating huge deficits."

Republicans counter that the entire country will benefit from tax reform/tax cuts and that tax reform, especially corporate income tax relief (35% down to 20%), will ignite a strong economic recovery and that recovery will extinguish any apparent deficit increase as the Treasury will benefit in significant income tax revenues across all tax brackets in a rising economy.

Of course the details of the plan are not yet final. Although President Trump and the congressional Republicans still champion the elimination of the estate tax, one wonders what chips will be traded to get this deal done. A deal desperately needed by the Administration and congressional Republicans. Stay Tuned!

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