Can you imagine anything more fun than attending a conference with a bunch of tax attorneys? Okay, maybe only interesting to a few people. What if, during the conference, more detailed information is released by the White House concerning proposed tax reform? Let the good times roll! This is the stuff of beer commercials and Hallmark cards! Okay, seriously, I know that many of you might not find that as exciting as I did. However, when you watch panelists and presenters, (who are used to making well-scripted remarks) scrambling to adjust their thoughts and insights at the last minute, there is real entertainment value.
I won’t try to give a detailed review of what might be in the final product, or give my odds on the chances of major tax reform passing both houses of Congress and being signed into law. There are too many variables, and there will be lots of “horse trading” before anything is finalized. However, I would like to point out some of the major considerations. Unlike the Bush tax cuts of 2001 and 2003 which “sunset” after 10 years, the Trump administration hopes to make “permanent” changes in the code. The main consideration between “temporary changes” (if you consider 10 years “temporary”), and “permanent” changes, is that “permanent” changes have to be neutral (i.e. not increasing the deficit at the ten-year mark and beyond). That means that the tax reductions must be offset by either producing new tax revenue in another area, or paid for by tax increases elsewhere.
So what are some of the “big” ticket items? The United States has one of the highest corporate income tax rates in the world. Reducing that rate from 35% down to 15% or 20% will cost about $1 Trillion in annual tax revenue. Doubling the standard deduction for most middle-income Americans and lowering tax rates generally to three or four brackets will cost another $1 Trillion in annual tax revenue. Two of the most significant ways to raise tax revenue is to no longer allow for the deduction of state and local income taxes and real estate taxes. That is estimated to increase tax collections between $1.2 Trillion and $1.5 Trillion annually. Another big source of additional revenue would be restricting the deductibility of mortgage interest, or restricting it only to a primary residence, and perhaps phasing out the deduction on mortgages of more than $500k. That is estimated to add between $500B and $1 Trillion annually.
You can see how these very large numbers will produce support and elation in those that benefit and panic and dread in those who may “lose”. For example, there are approximately 2,000 realtors who plan to descend on Washington next week (at least five realtors from each congressional district) to argue against losing the deductibility of mortgage interest, because they are convinced that it will hurt home values and sales. States with relatively high state and local income and property taxes will lobby against losing the deductibility of those items, while states with lower taxes will argue in favor. I haven’t met anyone who is confidently predicting what programs will definitively win or lose. However, for tax geeks and others, it is going to be very interesting.
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