Federal Tax Plan = Meaningful Cuts More Than Comprehensive Reform

The “Tax Cuts and Jobs Act” (H.R. 1) has finally arrived! The long-awaited details – over 400 pages worth – are now out there for all to debate. This is a debate that will play out before the House Republican Ways and Means Committee this week. Much of the public discourse will focus on how it impacts individuals, but for the business community it is the taxation of businesses, large and small, that is of the most significance.

The plan includes a reduction of the corporate rate from 35% to 20%, an important and meaningful step. It also caps the taxation of income derived from pass-throughs (S corporations, LLCs, partnerships and sole proprietorships) at 25%. Key provisions are outlined below. And if you are truly into tax law, the full bill is also available, as is a section-by-section summary.

Now you may note that this legislation is labeled a tax cut, not tax reform. And while many will call it that, it is probably better characterized as a tax cut bill. Cuts are good, and these measures will certainly be the impetus for some level of economic growth. But the trillion dollar questions remain: How much will it spur in gross domestic product (GDP) growth? And, can that realistically be enough to offset the projected reductions in tax collections?

Nobody can really know the answers to these politically-charged questions. But as you read the “scoring” of this legislation (to be published by the Congressional Budget Office after passage out of the House Ways and Means Committee), you may consider these items for context: the GDP growth rate in the United States averaged 3.22% from 1947 until 2017; GDP has pleasantly surprised people by breaking the 3% mark the last couple quarters; and the GDP will probably need to go a good bit higher to prevent the bill from adding substantially to the already staggering federal deficit. So listen for what growth rates are assumed in the projections that will be discussed and debated – and draw your own conclusions.

Key provisions affecting businesses

  • Reduces the corporate tax rate: The rate will drop to 20% from the current 35% and is designed to be permanent.
  • Establishes a repatriation tax rate: The repatriation rate on overseas assets for U.S. companies would be as high as 12%. The bill also may include a mandatory repatriation of all foreign assets. Illiquid assets would be taxed at a lower rate, spread out over a longer period than liquid assets like cash.
  • Creates a 25% rate for pass-through businesses: Instead of getting taxed at an individual rate for business profits, people who own their own business would pay at the so-called pass-through rate. (There will be some guardrails on what kinds of businesses can claim this rate to avoid individuals abusing the lower tax.)

Key provisions affecting individuals

  • Creates new individual income brackets:
    • 12% for income up to $45,000 for individuals and $90,000 for a married couple
    • 25% up to $200,000 individual/$260,000 couples
    • 35% up to $500,000 individual/$1 million couples
    • 6% over $500,000 individual/$1million couples
  • Caps state and local property tax deduction at $10,000, but does NOT cap income or sales tax deductions.
  • Eliminates the estate tax: The threshold for the tax, which applies only to estates with greater than $5.6 million in assets during 2018, would double to over $10 million; the plan then phases out the tax after six years.
  • Does NOT change taxation of 401(k) plans.
  • Increases the child tax credit to $1,600 from $1,000. The bill would also add a credit of $300 for each non-child dependent or parent for five years, after which that provision would expire.
  • Limits home mortgage interest deduction: On new-home purchases, interest on loans up to $500,000 would be deductible. (The current limit is $1 million.)
  • Nearly doubles the standard deduction: To avoid raising taxes on those currently in the 10% tax bracket, the standard deduction for all taxes would increase to $12,000 for individuals (up from $6,350) and $24,000 for married couples (up from $12,700).
  • Eliminates most personal itemized deductions and many credits. The only deductions preserved explicitly in the plan are for charitable gifts and edited home-mortgage interest.
  • Repeals the alternative minimum tax (AMT). The tax, which forces people who qualify because of an outsized number of deductions, would be eliminated under the legislation.

Full policy highlights of the bill can be found here.

Keep in mind this is the House’s plan and it will be subject to a different form of scrutiny in the Senate. So regardless all the prior coordination among those working together on this effort for months, some (perhaps many) things will change – they always do!

As for the timeline, it’s hard to say. But we do know that the House Ways and Means Committee will begin hearing amendments this week, and the process could take several days. A vote on the bill by the full House, as it is passed out of Ways and Means, is anticipated to come as early as November 13. From there it goes to the Senate Finance Committee, then full Senate. Optimists hope for something to pass before the end of the year. However, don’t be surprised if the debate isn’t carried over into the beginning of 2018.

Indiana’s delegation members are also weighing in with their views on the new tax bill. Chief among them is Congresswoman Jackie Walorski (IN-02), a member of the pivotal House Ways and Means Committee: “Hoosiers deserve every opportunity to achieve success and live the American Dream, and that’s what tax reform is all about. The Tax Cuts and Jobs Act will help American businesses expand, invest and hire more workers, and it will let middle-class families keep more of the money they earn. It’s time to fix our broken tax code and level the playing field for hardworking Americans by once again making America the best place in the world to do business.”

Resource: Bill Waltz at (317) 264-6887 or email: [email protected] 

Poll Results: Consumers Can Make the Difference

While Washington — the President and/or Congress — receives most of the criticism (and high disapproval ratings) for whatever ails our country, respondents to our recent poll question took a different path.

The question was posed this way: What person/group can do the most to provide a boost to the economy? Your overhwhelming answer: 79% said individual consumers. Ten percent each offered federal regulatory agencies and state government officials.

Yes, there’s something to the way the question was worded. If we had asked who was to blame for the slow economy, then the White House and Congress likely would have led the way. With our "who can do the most?" terminology, consumers are a logical response. In other words, start spending and economic activity in various forms will return.

But consumers, both individuals and business, are not acting because of the uncertainty. And the uncertainy is typically blamed on guess who — those in Washington who are failing to provide anyone with the ability to know or even guess what is coming next.

Or maybe I’m just reading a little too deep into it.

Just wanted to share those results and let you know a new question is on the site (upper right corner). It asks: Should online retailers (on a national basis) be required to collect sales taxes? And if you need background on that complicated topic, take a look at this recent analysis from the Chamber’s Bill Waltz.

Committee Easily Breaks the 3-hour Budget Barrier

The Senate has a plan. Not everyone may be in agreement, but at least there is a plan. And the Appropriations Committee fulfilled its part of the mission this afternoon by passing a budget bill (expectedly much more similar to the governor’s proposal than the legislation that passed the House on Thursday) in just over two hours.

Sure, the amendment and full bill were approved on 8-4 party-line votes and the real differences have yet to be heard. While most on both sides applauded the work of the committee in preparing the budget bill, Sen. Earline Rogers (D-Gary) did offer that "it’s not as bad as it could have been."

Limited testimony came from a wide variety of sources (including the Chamber’s Bill Waltz and Derek Redelman), most of whom have worn out a path to the Statehouse for similar sessions the past six months. Redelman, by the way, was questioned by Sen. Lindel Hume (D-Princeton) about the role of the Chamber and why the organization is so interested in education and charter schools. Redelman eloquently answered (no need for further details), Hume lauded the Chamber for its overall work and life went on. An interesting and strange sidebar it was.

Senate President Pro Tem David Long (R-Fort Wayne) outlined a plan for second reading amendments to the budget Monday (session begins at 2:30 p.m.; Republicans in caucus at noon and Democrats at 1:30) and third reading passage on Tuesday, leaving one week for conference committee negotiations. Long also introduced a bill that puts a contingency plan in place in case an agreement is not reached by June 30. He explained that the process needed to be initiated today to maintain the rules for bill passage and not force legislators into session (when not needed) and costing the taxpayers more money.

Senate Minority Leader Vi Simpson (D-Bloomington) expressed concern that the language gives the state budget director too much power, considers the movement of this bill as "admitting defeat" and called Long’s reasoning for needing to introduce the bill today as a "straw man" argument. Her concerns will likely appear in amendment form on Monday.

The day ended with the full Senate accepting the committee reports on the budget bill and contingency legislation. The drama resumes on Monday. 

Taxing Times Continue for Many

For the third year in a row, I filed my family taxes only to then receive a "replacement tax statement package" from my investment company of choice. (Yes, those investment totals continue to shrink, but who isn’t sinking in that boat).

But we’re here to discuss business taxes — with the complications there making my amended 1040 seem rather paltry. The Indiana Chamber continues to offer a variety of resources to assist companies with federal and state needs, while the Indiana Department of Revenue (IDOR) has put in place a new online tool to make it easier to conduct business with the state.

Newcomers first: IDOR’s New and Small Business Education Center provides interactive video assistance and a direct connection to INtax — where needed forms can be obtained and various types of taxes can be paid. IDOR Commissioner John Eckart offers the example of a business that is expanding and hiring new employees being able to find information about state withholding taxes.

Chamber resources come in a trio:

  • The 2009 Indiana Tax Conference on June 2-3. Participants learn the latest federal and state changes from issue experts
  • The Indiana Taxation Handbook, which includes numerous recent updates and provides comprenhensive information in an easy-to-understand manner
  • A free tax helpline (for Chamber members only), manned by Chamber tax and fiscal policy expert Bill Waltz, who can answer your questions and link you to additional resources

Don’t go it alone. Take advantage of the tax help that is available in our state.