GOP tax reform bill just keeps getting worse
As if the Republican tax reform plan wasn’t bad enough already for taxpayers, the latest scheme to win over more votes of a precarious Senate majority involves adding a “trigger” to raise certain taxes if there isn’t enough economic growth to cover the $1.4 trillion cost of the bill, though the Senate's parliamentarian appears to have just shot down that proposal.
The taxes would mainly fall on corporations, which are already getting the lion’s share of benefits from the legislation, along with ultra-high net worth taxpayers. Conservative lobbying groups like the U.S. Chamber of Commerce and Americans for Prosperity have been working to beat back the “trigger” proposal, arguing it’s a “nutty idea” and would “diminish the bill’s positive growth effects” (see Senate GOP’s talks on tax ‘trigger’ draw scorn from economists).
Few economists expect the bill to generate the amount of economic growth its proponents have been predicting, and the Senate's rulemaking official now says the proposal for a trigger wouldn't pass muster under Senate procedures. That leaves lawmakers looking for new revenue offsets as the latest report from Congress's Joint Committee on Taxation predicts $1 trillion in debt that won't be made up for by economic growth projections (see Tax debate update: Senate Republicans scramble to salvage bill). The economy is already at close to full employment and many corporations have trouble finding enough workers to fill open positions. Companies have been reluctant to raise wages despite the economic boom of recent years, but the predictions for a trickle-down effect that would raise wages by thousands of dollars and lead to a boost in hiring have little likelihood of success. Most public companies are expected to use the funds from tax cuts for share buybacks and stock dividends instead of jobs.
While the bill aims to provide corporations with a “permanent” cut in their tax rate to 20 percent, the tax cuts for individuals would only be temporary, many of them expiring in 2027, but others much earlier. Only two ago, with the PATH Act of 2015, Congress voted to make many of the tax extenders “permanent,” including deductions allowing schoolteachers to write off the cost of school supplies they pay for out of pocket, and deductions for state and local sales taxes. Until then, Congress had to vote to extend the expiring provisions year after year, leaving taxpayers and tax professionals with lingering uncertainty until Congress finally acted, usually sometime in late December.
That “permanency” lasted just a short time. Now, with the Tax Cuts and Jobs Act, get ready for all that uncertainty to return. The bill will set up a series of fiscal cliffs as the temporary tax cuts for individuals expire, leaving a dysfunctional Congress to decide whether to renew the doubled standard deduction and other provisions. The Tax Policy Center estimates that under the Senate version of the tax bill, 9 percent of taxpayers would pay more in taxes in 2019 than under the current tax laws. By 2027, the percentage would increase to 50 percent, mainly because the personal tax cuts would expire. The legislation not only does away with popular tax deductions like write-offs for state and local taxes, but also gets rid of personal exemptions. The bill also ends deductions for student loan interest and tax tuition waivers for graduate students. For high-end taxpayers, on the other hand, it eliminates the alternative minimum tax and further limits the estate tax.
Many of the popular tax deductions and tax planning strategies that tax professionals and their clients have counted on for years would be eliminated if the tax reform bill gets passed. Careful retirement planning strategies and investment strategies would also be upended. Pass-through businesses like accounting firms and their small business clients would be forced to go through complicated calculations to find ways to qualify for the lower tax rates already guaranteed to corporations.
The legislation is likely to increase government borrowing as the deficit increases by $1.5 trillion or more, as lawmakers extend expiring provisions to prevent even steeper tax hikes. That is likely to force the government to borrow further from the Social Security and Medicare trust funds, possibly forcing cuts in those programs, while crowding out other borrowers who need funds to expand their businesses.
The impacts are far-reaching, with a provision to repeal the individual mandate in the Affordable Care Act threatening to destabilize the health insurance market and lead to millions of people dropping their health coverage and losing their tax credits. Another provision would open up the Arctic National Wildlife Refuge to oil and gas drilling. The House version of the bill would eliminate tax-exemptions for private activity bonds, which are used across the country to fund needed infrastructure projects.
If the trigger provision is included, corporations too would find themselves paying higher taxes than the 20 percent rate they had planned on, likely prompting layoffs and cutbacks in their expansion plans. All in all, the tax reform bill is a disaster waiting to happen. While it will allow Republican lawmakers and President Trump to claim a temporary victory and a way to satisfy donors who have been pressing for lower tax rates for big corporations and upper-income taxpayers, the unpopularity of the legislation with voters according to nearly every poll is bound to lead to buyer’s remorse for any lawmakers who vote to pass the misbegotten legislation.