- State and local tax deductions could be on the chopping block.
- The investment income tax of 3.8 percent for high earners likely will remain.
- The last major tax code rewrite took years.
Despite facing September deadlines to increase the debt ceiling and pass a new federal budget, Republican congressional leaders have made it clear that tax reform will be their legislative priority when they return from their August recess.
Yet exactly what's in their plan remains unclear. And based on a joint White House-GOP statement — which outlines a philosophical approach to changing the U.S. tax code but includes no specifics — even lawmakers are unsure what they will begin debating next month with the goal of passing a bill before the end of the year.
"One big challenge they face is that there's no clear starting point," said Kyle Pomerleau, director of federal projects for the Tax Foundation.
Nevertheless, Republicans are in their home districts this month, charged with ginning up popular support for tax reform. Various activist groups are waging campaigns, too, in an effort to sway public opinion.
Part of the uncertainty arises from the differences between President Donald Trump's most recent wish list and last year's Republican blueprint for tax reform. There also are differences among Republicans themselves, and the potential for Democratic pushback is high if only wealthy Americans benefit from any proposed changes.
Additionally, the balance between corporate tax cuts and individual relief could prove trickier because the idea of a levy on imports — which would offset reduced revenue from corporate tax relief — has now been nixed, according to the GOP statement released last month.
Nevertheless, Republicans are "fully committed to ensuring that ordinary Americans keep more of their hard-earned money," according to the statement. It also says reform would "eliminate most of the tax breaks that mainly benefit high-income" taxpayers.
- Reducing marginal rates on regular income and reducing the number of tax brackets from seven to three
- Expanding support for child care and expenses
- Killing the estate tax
- Repealing the Alternative Minimum Tax
- Increasing standard deductions
- Lowering taxes on investment income
- Eliminating all deductions except those related to mortgage interest and charitable contributions
One popular blue-state deduction facing the congressional axe is for state and local taxes. Known as the SALT deduction, it's one of the largest federal tax expenditures, with an estimated revenue cost of $100 billion in 2018, according to Tax Foundation data. Eliminating this provision would raise $1.7 trillion over a decade.
"A lot is riding on the state and local tax deductions," Pomerleau said. "If they get rid of that, they could bring down [income tax] rates significantly. But if they only end up capping the deduction, rates won't come down very much."
According to the Joint Committee on Taxation, more than 88 percent of the benefit of the state and local tax deductions went to taxpayers whose incomes were more than $100,000 in 2014.
Likewise, the Alternative Minimum Tax — which requires 5 million taxpayers to calculate their liability twice and pay the higher amount — typically affects higher earners.
In 2013, only 4.14 percent of households earning below $200,000 were subject to the AMT, according to the Tax Foundation.
"The AMT has been painful for taxpayers and tax preparers for years," said Laurie Siebert, a CPA and senior vice president of Valley National Financial Advisors in Bethlehem, Pa. "I'd like to see it go away, because it's complicated but it really doesn't help the middle class."
Meanwhile, although Republicans have wanted to eliminate the 3.8 percent net income investment tax created by the Affordable Care Act, their hopes were pinned to repealing and replacing the act, an effort that failed last month in the Senate.
The investment tax affects taxpayers with modified adjusted gross income of more than $200,000 for single filers and $250,000 for married couples filing jointly.
"The standard assumption is that the net investment income tax will remain in place," Pomerleau said. "The challenge would be the $200 billion in revenue lost over a decade. You'd have to offset that somewhere."
Many of the proposed changes have appeared in various legislative iterations in the past. Yet this is the first time in a decade that Republicans rule both chambers of Congress and the White House, giving them an opportunity to push through reform, possibly without bipartisan support.
If successful, it would be the first major rewrite of the U.S. tax code since 1986. Whether it can get done by the end of the year, however, is questionable.
The two tax-writing committees — the House Ways and Means Committee and the Senate Finance Committee — are charged with developing and drafting legislation in the fall.
Yet even the GOP tax-reform blueprint points out that the 1986 reform under President Ronald Reagan took "three years of difficult work in Congress."
"They'll be going through all the details and trying to make the different pieces work," Pomerleau said. "It's hard to tell exactly how it will shake out."