Navigating Tax Policy Shifts: A Look at the 116th Congress

Navigating Tax Policy Shifts: A Look at the 116th Congress

In December 2017, Republicans ushered in a landmark tax reform with the passage of legislation that echoed the scale of Ronald Reagan's Tax Reform Act of 1986. Fast forward a year, and the Democrats now hold the reins in the House of Representatives, sparking speculation about the trajectory of tax policy in 2019 under the 116th Congress.

Before peering into the future, it's imperative to reflect on recent history. The inception of all tax bills occurs in the House of Representatives. In late September 2018, the Republican-controlled House embarked on what was dubbed "Tax Reform 2.0." This new legislation comprised three integral parts: the Family Savings Act (H.R. 6757), the American Innovation Act (H.R. 6756), and the Protecting Family and Small Business Tax Cuts Act (H.R. 6760).

Tax Reform 2.0: A Closer Look

1. Family Savings Act:

  • Objective: Alleviate compliance burdens for employer-sponsored retirement plans and boost retirement savings.
  • Key Changes:
    • Rules governing multiple and pooled employer retirement plans were overhauled.
    • Introduction of tax-preferred "Universal Savings Accounts."
    • Exemption from required minimum distribution rules for individuals with account balances below a specified threshold.

The Family Savings Act garnered bipartisan support in the Senate, with Senate Finance Committee Chairman Orrin Hatch (R-Utah) and Democratic Senator Ron Wyden (D-Oregon) co-authoring a retirement savings bill (S. 2526) that echoed similar provisions. The bipartisan interest from the Senate suggests ongoing discussions about these provisions post-midterm elections.

2. American Innovation Act:

  • Objective: Amend the Internal Revenue Code by modifying deductions for start-up and organizational expenditures, and treatment of losses, carryforwards, and unused pre-change tax credits post-ownership change.
  • Key Changes:
    • Increased deduction limits for start-up and organizational expenditures.
    • Removal of limitations on the use of losses, carryforwards, and unused pre-change tax credits for new loss corporations after an ownership change.

Both the Family Savings Act and the American Innovation Act passed the House of Representatives on September 27th, 2018, with a vote of 240-177. However, the vote followed party lines, and neither bill has advanced to the Senate.

3. Protecting Family and Small Business Tax Cuts Act:

  • Objective: Repeal the December 31, 2025 expiration date for provisions temporarily changed by the Tax Cuts and Jobs Act (TCJA).
  • Key Changes:
    • Permanent extension of individual income tax brackets, rates, standard deduction, child tax credit amounts, business income deduction, and AMT exemption amounts under current law.
    • Permanent repeal of deductions for personal exemptions and certain itemized deductions.

The Congressional Budget Office (CBO) classifies the Protecting Family and Small Business Tax Cuts Act as "major legislation," estimating a $545 billion increase in deficits over the 10-year budget window. This expensive venture, primarily championed by Republicans, faces an uphill battle for permanency, especially considering the Democrats' reservations about the initial legislation.

Democratic Leadership and Tax Agenda

The spotlight in the 116th Congress turns to Richard E. Neal (D-MA), expected to chair the House Ways and Means Committee. Neal, the ranking member, is poised to influence the tax legislative agenda.

Neal's policy focus, as outlined on his Ways and Means webpage, hints at potential areas of alignment and contention:

  • National Savings Rate: Neal has sponsored legislation to increase the national savings rate through incentivizing Individual Retirement Account (IRA) use.
  • Health Care and Tuition Expenses: Advocacy for making health care and tuition expenses tax-deductible for middle-class households.

These priorities suggest that certain provisions in the Family Savings Act, such as universal savings accounts, may resonate with Neal. Additionally, Neal is a staunch supporter of eliminating the Alternative Minimum Tax (AMT) for middle-class families and safeguarding Medicare and Social Security.

Forging Consensus in a Divided Congress

For any deals on tax breaks to materialize, consensus must emerge from the Democratic-led House and the Republican-controlled Senate. This dynamic mirrors the situation during the passage of the Tax Reform Act of 1986 under Reagan. Observers speculate that the cap on state and local deductions imposed by the TCJA could be a focal point for debate in the 116th Congress.

Despite conjecture, pundits on both sides acknowledge slim chances of House Democrats attempting a wholesale repeal of the TCJA or its major provisions. Even if such attempts find success in the House, a Republican-dominated Senate poses a formidable barrier. The critical issues confronting both chambers involve provisions slated to expire next year and the unresolved errors and inconsistencies in the TCJA statute unaddressed in 2018.

A Landscape of Debate and Marginal Changes

While no one possesses a crystal ball to predict the future, it's reasonable to anticipate that a significant tax reform bill might not emerge anytime soon. Instead, the next two years are likely to be marked by debates and discussions, focusing primarily on discrete and marginal changes—an expected trajectory for a divided Congress.

Tara Fisher, an esteemed figure in international tax for nearly two decades, brings a wealth of experience from various professional domains, including the U.S. Congress Joint Committee on Taxation, PricewaterhouseCoopers' national tax practice, the University of Pittsburgh, and American University in Washington D.C. Holding a CPA license and degrees in accounting from the University of Virginia, Fisher remains a prominent voice in the evolving landscape of tax policy.

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