The recently released House Republican tax bill proposes to make significant changes to the current Internal Revenue Code. The proposal will now wind its way through the committee process which may dramatically alter the bill.
The bill would, among other things, (i) reduce the corporate income tax rate from 35% to 20%, (ii) create tax brackets of 12% (for taxpayers earning up to $90,000), 25% (for taxpayers earning up to $260,000), 35% (for taxpayers earning up to $1 million) and 39.6% (for taxpayers earning more than $1 million), (iii) increase the standard deduction for spouses to $24,000 from $12,700, (iv) create a 25% rate for income that is passed through partnerships and S corporation, and (v) phase out the estate tax regime over a period of 6 years.
There are significant issues that both Republicans and Democrats have raised about the bill. While the bill would practicably double the standard deduction, it would limit the deduction for paid state and local property taxes to $10,000. In states where state and local taxes are relatively high, such as New Jersey, New York and California, this $10,000 limit could dramatically reduce the deductions available to taxpayers. Republican representatives in those states are wrestling with this issue.
Another significant limitation of the bill, which also will have a heightened impact on those same states, is the bill’s limitation on deducting mortgage interest. Currently, homeowners can itemize all of their paid mortgage interest. However, under the bill, mortgage interest on newly purchased homes could only be deducted for mortgage amounts up to $500,000. Interest on amounts in excess of $500,000 would not be deductible.
The bill would add $1.49 trillion to the national deficit over ten years, which will provide a major hurdle when the bill is considered by the Senate. To push the bill through the Senate without requiring Democrat support, the Republicans are using the budget reconciliation process, which would allow the bill to pass by a simple majority, rather than 60 votes. However, in order to pass the Senate, the bill must satisfy the so-called Byrd Rule, which for fiscal 2018 requires that a bill not add more than $1.5 trillion to the deficit over 10 years and does not add to the deficit thereafter. While the bill does not exceed the $1.5 trillion mark in the first ten years, it would add $156 billion to the budget shortfall in fiscal 2027, which would run afoul of the Byrd Rule and permit the Democrats to demand that a 60 vote approval be required.
In short, there is much work to be done before the bill becomes law, and it is quite likely that the final product will be very different from the bill’s initial framework. We shall see.
John Varella is an attorney with Lourie & Cutler, Boston, Mass.