Tax Reform in Light of the Mid-Term Elections

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With control of the House of Representatives — and with it the tax-writing Ways and Means Committee — flipping solidly into the ‘D’ category this month, what will become of the Republican-backed tax reform we’ve written so much about?

In short, not a whole lot, but expect some noise and potential movement on a few key tax provisions before the end of 2018.

Democrats took control of the House (and, by default, the House Ways and Means Committee) but failed to take the Senate. Given the current climate in Washington, any changes to the Tax Cuts and Jobs Act originating from the Democratic House are very likely to be shot down in the Republican Senate. That doesn’t mean we won’t hear chatter or even see some hearings on key provisions, but that’s really just campaign talk for the next election. The next two years is likely to be really steady as far as tax changes are concerned.

Now, there is a chance, albeit small, that the current House Republicans, who don’t leave until January, can make some changes. Exiting Republicans will have to find a legislative vehicle to attach tax law changes to, or pass them through reconciliation, but here’s where I think we could possibly see some movement:

Middle-class tax cut

The president has floated the idea of a 10% middle-class tax cut multiple times and promised to get it done before the midterms. Without Republican control of both houses of Congress, he faces a new challenge.

On Wednesday, the president opened the door to working with Democrats if they supported a middle-class tax cut  — even if it meant potentially raising the corporate tax rate which is now set at 21%. That’s scenario #1. More likely is scenario #2: making small tax changes — such as altering the paid family leave credit — through a budget bill later this year, which would allow Republican leaders to use the House-Senate reconciliation process to push additional tax cuts through. Note that Republicans will lose the reconciliation option come January with the loss of House majority.

Technical corrections to the Tax Cuts and Jobs Act

There are some mistakes in the TCJA that require a legislative fix, the most important being one that would allow first-year bonus depreciation for qualified real property additions as Congress intended. Republicans might attempt to pass a technical corrections bill now while they can.

SALT deduction

One possible area for negotiation might be the $10,000 limit on the state and local tax deduction, also known as the SALT deduction. This one stands a chance given that high-tax-state senators will back it.

Tax Reform 2.0

Tax Reform 2.0, the main idea being to make permanent the TCJA’s temporary federal income tax rate cuts for individual taxpayers, the doubled child-tax credit, and the deduction for up to 20% of qualified business income (QBI) from pass-through entities, is likely dead as a whole given the election results. Still, there is some bipartisan support for one of the three bills that the (Republican) House passed as part of“Tax Reform 2.0” in September: the Universal Savings Accounts to allow workers and families to save for retirement. That could get pushed through in the next few months.

It’s now or never time. With the country so deeply divided along partisan lines, we’re likely to see more gridlock than cooperation come 2019. Republicans have one last chance to push through changes to tax reform in this lame-duck session of Congress. If they don’t, you can confidently follow the guidelines we’ve published on tax reform thus far. It’s going to be a stagnant few tax years.

 

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