What's in the GOP Senators' Tax Bill?

The Senate is working on their own version of a tax bill that would need to be reconciled with, or replace, the bill that the House is working on. We're going to look at what's in the Senate bill. We've seen a lot of oversimplification of this that seems to intentionally cherry-pick certain parts of it without looking at the whole picture. 

So let's dive in and figure out what's going on.

Remember The Byrd Rule

To avoid filibuster, the GOP will be using budget reconciliation rules in the Senate, which would allow them to pass with 51 votes (which could be 50 senators plus VP Mike Pence). The Byrd Rule says that to use budget reconciliation rules, a law cannot increase the deficit over a 5 or 10-year period. That means they need to make it budget neutral.

What's In the Plan

Double the Standard Deduction

Instead of being able to deduct $6,350 per person ($12,700 more for families), you'd be able to deduct $12,000 as an individual. For the vast majority of people (70%), this would mean being able to deduct a lot more, because most people don't get to the standard deduction. This is also a boon for lower- and middle-income payers more than wealthy payers, because wealthy people tend to deduct a lot more.

Eliminate the State and Local Tax Deduction (SALT-D)

Currently you can deduct your state and local taxes (SALT) from your federal taxes, so you're not "taxed twice." Critics see SALT as an unfair perk for states with higher income tax rates, because they're essentially transferring money from the federal government to their own revenues, rather than having to take it from their taxpayers directly. Those supporting eliminating the deduction say it's more fair for states that have lower income tax rates, and creates better incentives for states to take responsibility for their budgets.

Opponents note that it would raise taxes for a lot of Blue states--they happen to pay the most in state income taxes. They argue that it is a political move.

Eliminating Lots of Other Deductions

Remember the standard deduction going up? It would coincide with eliminating a lot of itemized deductions. 

The House bill eliminates a lot more deductions, including deductions for some medical expenses and student loan payments, and taxing grad student income as regular income.

One interesting elimination would be the mortgage interest deduction. The House bill cuts the eligible debt you can deduct for your mortgage from $1.1M to $500k. The Senate bill would cut it to $1M instead. Supporters of the cut say that at higher levels the mortgage deduction is giving free money to the wealthy to spend on lavish homes, and over-inflates the housing market by incenting people to invest. Opponents of the deduction cut say that it raises the burden on middle-class people to buy a home.

Combined with a higher standard deduction, a whole lot of people wouldn't need or be able to use the mortgage deduction.

Expand the Child Tax Credit but Eliminate Personal Exemptions

You would get $2,000 in credit per child rather than $1,000. A credit is different from a deduction so it would not be affected by the changes to deductions.

The personal exemption of $4,050 would be eliminated. 

Slightly Adjust Tax Rates

The income level required to enter the top marginal tax rate would be increased from $480,000 to $500,000 for an individual, and the marginal tax drops from 39.6% to 38.5%. However, the tax rate just below that stays at 35% (and the one below that at 32.5%) so it's not a huge break. Every other tax bracket remains the same but the income required to be in it jumps up a bit, similar to the top tax rate. 

(The House bill reduces the number of tax brackets to only four, typically at lower levels, and further increases the marginal taxable income.)

Repeal the Alternative Minimum Tax (AMT)

The AMT is a weird thing that was put into place to make sure that people couldn't deduct too much stuff and pay almost no taxes. It is usually paid by people making between about $200,000 to $1M. According to CNN Money: "Tax experts often note the AMT no longer meets its original purpose and further complicates an already complex tax code. But it's been kept on the books because it raises a lot of revenue."

With fewer deductions available, fewer people would have been required to pay AMT in the new bill. 

Increase Exemptions for the Estate Tax

For individuals, exemptions to the estate tax would increase from $5.5M to $11MM. Because people die a lot less often than they work, this is going to have a smaller impact than it appears to. The super-rich would still pay a lot of estate tax.

Probably Increase Taxes on Large Investors

One provision requires that investors are taxed when they sell shares rather than when they vest. This would likely increase their taxes; read more here

Reducing the Corporate Tax Rate

The United States has one of the highest corporate tax rates in the modernized world, at 39.1%. The bill would decrease it to 20%. Supporters of the tax cut say it would incent more businesses to set up operations in the US rather than abroad, so there would be more economic activity in the United States, and a higher portion of corporations actually paying taxes in the US rather than using various overseas mechanisms to not pay them. Opponents believe corporations should pay more (or at least the same) taxes than they do now.

The corporate tax rate would take effect in 2019.

It would also change the US's tax code for corporations to only tax profits made in the US, rather than overseas. Most countries do this, and currently US businesses with overseas profits pay taxes twice--where they earned the money, and to the US. 

Other Corporate Stuff

  • Make it easier to immediately and fully expense new equipment. This is meant to stimulate more capital investment.
  • It would lower taxes on small business owners by reducing the pass-through tax rate (most small businesses are pass-through entities)

ACA Mandate Repeal

As of November 14, the GOP added a repeal of the ACA/Obamacare mandate to the tax plan. It would mean getting rid of the tax penalty for not having insurance. The CBO estimates that 13 million people would choose not to get health insurance due to repealing this tax penalty (I'm not sure why, but there you have it). Supporters of eliminating the mandate point out that 90% of households who pay the tax make less than $75,000 per year, and more than 33% who pay it make less than $25,000.

With fewer people signing up, the government pays fewer subsidies, so it saves a lot of money. This would allow the government to cut more taxes while still meeting the Byrd Rule requirements.

Getting to the Byrd Rule

At the 9th year, the individual tax cuts would be eliminated, such that in the 10th year, the deficit is not higher. It's unclear whether the Senate hopes that the momentum of the tax cut would just carry it through after that. Paul Ryan certainly hopes the cuts would be renewed.

The Result

About 9% of people would pay more in taxes, and these people are scattered across the income scale. About 29% would have approximately no change in their tax level, and about 60% would see a reduction of $100 or more per year. That's before 2027.

After 2027, when the individual tax cut goes away, 25% of households see a tax increase. The increase is spread across the range of income. 

Corporations would also pay a lot less in taxes, starting in 2019.

Can it Pass?

Maybe. Wisconsin Republican senator Ron Johnson just came out against it, because it benefits corporations more than other kinds of businesses.

“It doesn’t really address the core problem as I understand it,” Johnson said. “We’re moving in the wrong direction.”

It's unpopular. In a November 15th Quinnipac University poll, 52% of Americans opposed the bill and 25% supported it.

The worst prospects for the bill are probably the Obamacare mandate cuts. Senators McCain, Collins, and Murkowski voted against the "skinny" repeal that scrapped the individual mandate. They may vote against it again. With Johnson out, the Republicans can only afford to lose one more senator if this is going to pass. 

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Erik Fogg

We do politics, but we don't do the thinking for you.