On September 10, 2018, House Republicans unveiled their “Tax Reform 2.0” legislative package, which has been anticipated following the enactment of the Tax Cuts and Jobs Act (TCJA) on December 22, 2017. The House Ways and Means Committee held its markup of the measure on September 13, 2018, and the legislation is expected to be ready for a full chamber vote by the end of September.
House Ways and Means Chairman Kevin Brady (R-TX) introduced the package in his opening statement at the Full Committee markup for Tax Reform 2.0:
“The Tax Cuts and Jobs Act changed the trajectory of our economy for the better. …But we can’t just stop there – we must keep building off the momentum from last year’s tax reform to ensure our economy keeps booming…That’s why this Committee is committed to ensuring our code continues to work for all Americans by being smarter for families and more competitive for businesses. The three bills that make up today’s tax reform update will do just that.”
Tax Reform 2.0 consists of three separate pieces of proposed legislation:
The Protecting Family and Small Business Tax Cuts Act of 2018 (HR 6760) – focuses on making the TCJA’s tax cuts for individuals and small businesses permanent
The Family Savings Act of 2018 (HR 6757) – includes provisions related to retirement savings
The American Innovation Act of 2018 (HR 6756) – encourages business innovation
The highlights of each bill are detailed below.
The primary focus of the tax reform package is to make permanent many of the tax cuts that were enacted as temporary provisions in the TCJA. The Republicans agreed to the limited applicability in the TCJA as an expediency to accommodate Congressional budget rules that allowed the GOP to pass the law with no Democratic support.
Most of the TCJA provisions affecting individuals were effective for years beginning after December 31, 2017, but expired at the end of calendar year 2025. Among the many changes currently set to expire at the end of the 2025 tax year are the reduced income tax rates for individuals, the cap on the itemized deduction for state and local income and property taxes, the expansion of the standard deduction, the elimination of personal exemptions, and the qualified business income deduction allowing a 20% reduction in taxable income from qualifying pass-through businesses.
In effect, the temporary nature of the individual tax changes serves to make planning very difficult and, if not altered, will essentially “unwind” all of the major provisions affecting individual taxpayers.
The Tax Foundation scored the effects of making the individual income tax changes permanent, and concluded that it would create 1.5 million new jobs and increase the long-run GDP by 2.2%. Click here to read the complete analysis
The second piece of the reform package would make two significant changes to the ways Americans save for retirement. First, it includes a number of reforms regarding age limits and contributions to retirement accounts, similar to those included in the earlier-proposed Retirement Enhancement and Savings Act of 2018. It would also create small universal savings accounts into which individuals could contribute up to $2,500 annually, with any withdrawals being tax-free. Additionally, the bill would modify and expand the provisions for Section 529 educational savings plans. Pennsylvania Representative, Mike Kelly, was a lead sponsor on this bill.
This bill is designed to help and encourage entrepreneurship and new businesses. Currently, new businesses can only deduct up to $5,000 of their initial start-up expenses. This legislation would allow these companies to deduct up to $20,000 of their start-up costs. It would also expand options for transferring other tax benefits, like operating losses and tax credits, to new owners.
Timing and Future Outlook for the Package
The release date for this legislation is not by happenstance, of course. Republicans wanted to release the proposals prior to the campaign season for the mid-term elections in an attempt to maintain GOP control of the Chamber in November.
However, prospects for the quick passage of this legislation are not good, and the likelihood of Congressional action before the election is extremely low. Reaction to the proposal has been mixed on the Republican side of the aisle, while Democrats oppose the passage of a second tax bill. In reality, even if the bills were to pass the House, there would be little or no chance to move the bill forward in the Senate as the special rules used by the Republicans to pass the TCJA would not be available this time around.
Grossman Yanak & Ford LLP will continue to monitor the progress of this legislation and report significant developments as they occur. Please direct any questions or comments to Bob Grossman or Don Johnston.