U.S House Passes Tax Reform Bill

On a 227-205 vote, along mostly party lines with 13 Republicans voting no, the U.S. House of Representatives has passed its version of federal tax reform. In the weeks ahead, the Senate is expected to take up it own different version, and if that passes the two chambers will be obliged to reconcile their differences into one final version.

The House bill places a new limit on the amount of state and local taxes that may be deducted by taxpayers — limiting that deduction to only property taxes, and only up to $10,000. That controversial provision has been shown by numerous analyses to cause effective tax increases on many middle class families. Maryland is expected to be among the most hard hit states by this provision, with the highest share of tax returns claiming SALT as a deduction under current law.

From coverage in The Hill:

Passage of the tax bill, which was unveiled just two weeks ago, was relatively drama-free compared to the GOP’s failed effort to repeal ObamaCare earlier this year.

The stakes are high for Republicans, who are feeling pressure to show that they can govern ahead of next year’s midterm elections. The Democratic wave in last week’s gubernatorial and state house elections in Virginia and New Jersey has only added to their anxiety.

GOP leaders are hoping to get legislation to President Trump’s desk by Christmas, an ambitious timeline given the obstacles that are mounting in the Senate.

Americans Against Double Taxation, a coalition opposing reduction/elimination of the State and Local Tax Deduction (aka SALT) offered this statement after the bill’s passage:

This is only the first step in a long process, and we will continue to fight to fully preserve SALT and stop tax increases on the middle class. The House vote eliminates the most frequently claimed deduction in the tax code for the middle class, which voters oppose by a 2-1 margin. It will lead to cuts in education, public safety and other vital state and local public services. It overturns more than 100 years of sound tax policy that protected taxpayers from double taxation, and creates a double standard by allowing corporations to claim a deduction that would no longer be available to individuals and families.

Some major elements of the House tax plan, from the Tax Foundation, include:

  • Individual Income Tax Rates and Brackets: Consolidates current seven income tax rates into four, while retaining the top marginal rate of 39.6 percent and including an income recapture provision which phases out the effect of the 12 percent bracket for high earners.
  • Standard Deduction: Increases the standard deduction to $12,200 for single filers, $18,300 for heads of household, and $24,400 for joint filers.
  • Itemized Deductions: Retains the state and local property tax deduction, capped at $10,000, while eliminating the remainder of the state and local tax deduction, except for taxes paid or accrued in carrying on a trade or business; limits the mortgage interest deduction to the first $500,000 in principle value.
  • Child and Family Tax Credits: Increases child tax credit value to $1,600, with the phaseout for joint filers beginning at $230,000, while creating a new $300 per-person family tax credit for those not eligible for the child tax credit, to expire after five years.
  • Treatment of Pass-Through Income: Caps the pass-through rate at 25 percent and adds a lower minimum rate, with anti-abuse rules.
  • Corporate Income Tax: Cuts the tax rate to 20 percent, effective tax year 2018.
  • Visit the Tax Foundation site for a more complete list of tax provisions in the passed bill.

    A summary of the proposed changes to the House plan being contemplated in the Senate as a so-called “Chairman’s Mark” is also available on the Tax Foundation website:

    Last night, Sen. Orrin Hatch (R-UT) released the “Chairman’s Mark” to the Senate’s version of the Tax Cuts and Jobs Act. This much-anticipated amendment includes a number of important changes to the tax plan, including fitting the package within the constraints imposed by the Senate’s so-called “Byrd Rule,” which places limits on what can be adopted under the reconciliation process.

    An article on the Route Fifty website discusses local governments’ efforts to understand and prepare for the potential fiscal effects of the still-unresolved tax changes:

    Forty miles west of D.C. sits Loudoun County, Virginia. Loudoun’s citizens have the highest home mortgage interest deductions of any county the country according to the Tax Foundation. Already in the fifth hour of an evening Board of Supervisors meeting on Nov. 8, the county spent 40 minutes discussing the pending House tax proposal and what it may mean for the county.

    Coupled with the potential elimination of the state and local tax deduction, the Board was concerned that the tax burden that once was deductible would quickly add up under both the House and Senate plans.

    “I’ve spend a heck of a lot of time with this tax plan and I’m telling you, for a lot of people in a typical Loudoun situation … you’re probably going to be net negative on this, even with the lower brackets,” Supervisor Matthew Letourneau said during the marathon session…

    Both MACo and NACo, among many other stakeholders, will continue to follow the developments on this landmark legislation, and its potential effects on Marylanders and local governments.

    Read previous Conduit Street coverage on federal tax reform.

    Michael Sanderson

    Executive Director Maryland Association of Counties