The House of Representatives passed a budget resolution this week that clears the way for Congress to quickly pass a tax-reform bill. Final details of a tax bill are still being determined but members have indicated that they hope to have a final bill approved by the end of November. “We need to get the tax bill out of the Senate by Thanksgiving,” said Texas Sen. John Cornyn, the Senate majority whip.
Easier said than done, however. The House budget resolution passed by only four votes. Twenty Republican members joined the Democrats, citing objections over deductions and the deficit effects of the budget. The resolution allows for deficits to increase by as much as $1.5 trillion over the next 10 years to pay for tax reform.
But deficits aren’t the only area where Republicans are still trying to find common ground. Below, see what is causing fissures among the ranks on the road to tax reform.
1. Votes in states with high SALT
The State and Local Tax deduction – the SALT deduction for the tax-wise – nearly derailed the House budget vote this week. More than 10 members from Pennsylvania, New York and New Jersey, where the tax deduction is larger than other parts of the country, voted against the resolution.
The SALT deduction is used by filers who itemize deductions. They can write off their property taxes as well as their state and local income taxes or general sales taxes. The SALT varies greatly by local where you live, with Northeastern states having some of the highest burden. More high earners than the middle class take advantage of it. Read CNN Money’s Jeanne Sahadi for a full breakdown of the deduction.
Because of its importance to areas with higher state and local taxes, members from those areas are resistant to repealing the SALT. Republican Rep. Tom MacArthur, of New Jersey, which has the highest property tax in the country, said he does not believe the House will pass a final tax reform bill without a change. “If the deductibility of SALT is just wholesale gone, I don’t think it can pass the House,” he said.
Republicans negotiating the SALT say they have ideas to change it. Options include not making it available to higher-income filers or even leaving the SALT in place.
The SALT deduction will likely continue to be at the center of debates. It’s estimated to free up more than $1 trillion in revenue. That kind of money will be critical to pay for other parts of the bill.
2. Will the middle class get relief?
One of the administration’s signature messages in selling their tax reform framework was that it will help the middle class. But not all are convinced that that’s true. Even President Donald Trump himself has floated that changes will be needed “if the middle class is not being properly taken care of,” he told Fox Business.
As it stands, it does not seem like the middle class is the big winner, or a winner at all. Economists evaluating the effects of the framework have been in heated and at times intense debate over how much the middle class benefits. They also say the framework is still incomplete and any analysis is still preliminary, based on an unfinished bill.
But even still, mainstream economists are resolute that the middle class will not benefit like high earners will.
An initial analysis by the non-partisan Urban-Brookings Tax Policy Center (TPC) found that many middle and upper-middle earners could see their taxes increase. The study found that 80% of tax benefits would go to those in the top 1%; 13.5% of middle income filers would pay an average of $1,000 more. The increase is tied to the loss of itemized deductions, notably the SALT deduction, which is a large benefit in some areas.
Economists also disagree over how much corporate tax changes will ultimately benefit middle-income earners. Trump’s chief economist, Kevin Hassett, says an average household can expect $4,000 in relief from the tax framework. Other economists have found this figure unlikely and say there is no way corporate taxes can ultimately benefit middle-class households so much and that the estimate is based on too many assumptions.
Either way, as a bill comes together, these questions will hang over it. The administration’s framework proposal notably did not include many specifics, like how large the child tax credit would be or who can use it. Final details and deals to get members on-board will necessarily impact the middle class.
3. Will a new bracket for high earners be too divisive?
The Trump administration tax framework calls for consolidating the current system of seven brackets into three. But it also opens the door to a fourth bracket on high earners. Paul Ryan and Trump have said that a fourth bracket is possible.
Trump said he only plans to use a higher bracket as a last resort, if he ultimately determines the middle class is not taken care of.
The idea is still in negotiations, but not all are on board.
Before the House vote, Ryan said in an interview on “CBS This Morning:” “We’re introducing the fourth bracket, so that high-income earners do not see a big rate cut and that those resources go to the middle class,” he said. Kevin Brady, chairman of the tax-writing House Ways and Means Committee, has also said he sees creating a higher bracket as the only way forward with a compromise.
But conservative leaders have pushed back at this idea as acquiescing to the left, according to Axios. Whether more revenues to bring members on board will be needed and where they’ll come from is still an open question.
4. The future of 401(k)s and deficits
Are 401(k) plans the third-rail of tax reform? It certainly seems like it. As House members see an opportunity to pay for proposed tax cuts, Trump says he’s not having it.
“There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!” Trump tweeted.
But that is not necessarily what’s being discussed on the Hill. “We are continuing discussions with the President,” Brady said at a Christian Science Monitor breakfast.
One proposal is to lower tax deductible contributions to 401(k). Currently, they’re set at $18,000 per year.
And the retirement plan industry has been further concerned that lawmakers would “Rothify” any contributions above the lower cap.
That is, your contributions would be made after-tax, as they are in a Roth IRA, but your gains and withdrawals would be tax-free. In other words, if lawmakers opt to “Rothify” 401(k)s, you would get no immediate tax break for saving money above the cap.