Tax Extenders Time is Here (December 11)

Update 318 — Tax Extenders Time is Here;
Perennial Policy Debate is Itself Debated

No holiday season on the Hill is complete without a tax extenders bill to re-up the temporary tax breaks expiring that given year.  A policy perennial, the annual debate can be seen as a natural way to review and renew breaks not ready to be codified.

But the argument is vitiated when these same breaks come up year after year and when the breaks become an occasion to fill the campaign coffers of members on the tax committees.  

More on the ecology of the extenders and an effort to end them below.  

Best,

Dana

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When Temporary Becomes, Well, Permanent

The set of tax breaks known as “extenders” is the temporary tax reductions, deferrals, and exemptions for individuals and businesses expiring in a given calendar year. They are used to achieve policy objectives or to promote or benefit certain investments. Their temporary status comes into question upon expiration.

In February this year, the Bipartisan Budget Act retroactively extended 32 provisions for tax year 2017. 28 of these 32 provisions are due to expire at the end of this year and Congress will likely vote to extend them yet again.

The Price of Permanent Indecision

The tax extenders saga has persisted for decades, as the number and scope of the tax extenders become narrower and narrower. Most valuable provisions have already been made permanent. What remains is a hodgepodge of provisions that fit into three buckets:

  • Special-interest provisions: These extenders give unfair tax advantages to disparate special interests, ranging from mortgage insurance premium deductions to tax credits for business activity in American Samoa. They are by far the largest category of provisions. 
  • Duplicative cost of capital provisions: Seven of the remaining extenders provide more amenable depreciation schedules for various industries. Provisions in the Tax Cuts and Jobs Act (TCJA) render some of these efforts redundant and inherently unfair, as they distort investment decisions to favor particular industries over another. 
  • Provisions that could be made permanent: Two of the remaining extenders offer an incentive for railroad maintenance and a credit toward mine rescue training costs. They are not as noxious as the rest and could be made permanent, either through law or through the appropriations process rather than by this perennial cycle of extension.

The nominal amount of the tax extenders is relatively small — around $90 billion if they were all continued permanently. However, the extenders set a bad policy precedent and fuel an annual breeding ground on K Street for quid pro quo negotiations between lobbyists and lawmakers.

There are other reasons why implementing tax policy by way of extenders is bad practice:

  • Retroactively authorizing tax provisions creates uncertainty and undermines any incentives that may be behind the provisions. Many tax extenders are provisions designed to create an incentive for a particular behavior by an individual or a business. The process of retroactively applying these tax breaks creates unnecessary uncertainty and undermines the original intent of some tax policy meant to incentivize behaviors. 
  • Many tax extenders are pure giveaways to special interests. Examples of these niche provisions that give a break to special interests include tax write-offs for racehorses and special depreciation schedules for “motorsports entertainment complexes.” These extenders clearly give special favors to certain industries. 
  • Tax extenders distort budget projections. Budget baselines assume that tax extenders expire at the end of their current extension. Their perennial renewal means that these supposedly temporary provisions are not adequately projected in budget forecasts, making their impact under-the-radar and not fully accounted for in the budget process.

Eliminating Extenders: A Signal Reform

There is a growing consensus across the political spectrum that tax extenders are not good policy. Organizations have individually expressed opposition in the past, but recently, a broad coalition released a letter rejecting tax extenders. This coalition includes a number of groups that don’t often agree on the correct course of action:

  • Committee for a Responsible Federal Budget
  • Economic Policy Institute
  • Freedom Partners
  • U.S. PIRG
  • Heritage Action for America
  • Institute on Taxation and Economic Policy (ITEP)
  • Americans for Prosperity

The reasoning behind the coalition’s opposition to tax extenders is simple: tax policy should not be changed from year to year. The use of tax extenders often results in retroactive policy and special interest tax giveaways, as opposed to long-term, meaningful tax reform. Although current Senate Finance Chair Orrin Hatch promised to end the practice by 2015, it has continued to be a widely used policy option in Congress.

Congressional Support

Senator Ron Wyden, Ranking Member of the Senate Finance Committee, is another vocal opponent of the year-by-year tax extenders process.  Wyden was a supporter of the PATH Act of 2015, a bill intended to curtail the repeated tax extenders exercise by permanently renewing some of the extenders. The bill was an important first step, but did not end the practice in its entirety.

On the House side, the incoming Ways and Means Committee Chair Richard Neal has expressed frustration about the consistent lapsing of tax provisions, but has not taken a position on tax extenders as a whole, instead focusing on specific extenders as they lapse.

Last Hurrah

In the dog days of this lame-duck, outgoing House Ways and Means Chair Kevin Brady is pushing for a sweeping tax bill that is unlikely to get to the Senate for a full vote, even if it were to pass the House. The original package contained provisions that would renew the tax extenders, but these provisions were not included in the latest version. Extenders may therefore move separately through Congress, making them more likely to pass before the end of the year.

There is a swath of bipartisan support in Congress for perpetuating the tax extenders, but calls for their removal from both the left and the right are growing. There may be some benefit in trialing certain incentives on a small scale for a temporary period, but the tax extenders process essentially turns what are meant to be temporary measures into de facto permanent provisions. Tax extenders ultimately lead to undesirable outcomes, and their practice should be ended.

Economic Policy Implications of the Midterms (November 13)

Update 312:  Economic Policy Implications
of the Midterms and the 116th Congress

The result of last week’s midterms will have important ramifications for economic policy during the 116th Congress.  Democrats have taken the majority in the House and will take majority control of key committees setting the legislative agenda.

More than 100 women were projected to win seats in the House of Representatives, easily shattering the record of 84.  Overwhelmingly, they were Democrats, including 30 candidates endorsed by 20/20 Vision (out of 40).

Below, a look at the economic policy implications of last week’s midterms.  

Best,

Dana

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Financial Regulation and Oversight

The Democrats’ winning the House gives Rep. Maxine Waters the gavel of the House Financial Services Committee (HFSC).  Depending on the final seat tally, between 10 and 12 new Democratic members will be added to the Committee. Waters’ vote against S. 2155 and continued opposition to deregulatory overreach will change the tone and direction of the Committee, making it unlikely that any new deregulatory bills get through the House.

Oversight is likely to be a central theme of Waters’ regime. Recent actions by the Financial Stability Oversight Council (FSOC) to de-designate the last remaining nonbank systemically important financial institution (SIFI), as well as staffing and budget cuts at the Office of Financial Research (OFR) are likely to be scrutinized. The HFSC under Waters will also be a bulwark against rulemakings and practices that increase systemic risk; regulators will likely be called in to testify, which will increase public accountability, and perhaps slow down the deregulatory agenda. Kathy Kraninger, a Mick Mulvaney acolyte, looks set to be confirmed as CFPB director by the Republican-controlled Senate, so a Waters-controlled HFSC will be a welcome check on the direction of the Bureau under Kraninger’s tenure.

Democratic Senators who supported S. 2155 didn’t fare well last week.  Sens. Joe Donnelly and Heidi Heitkamp both lost their reelection bids, leaving two vacancies to fill on the influential Senate Banking Committee. The loss of Donnelly and Heitkamp opens the possibility to get different Democratic voices on the Committee, which will hopefully provide some welcome dissent to the Committee’s deregulatory program during the last Congress.  Kyrsten Sinema, the recently-announced winner of the Senate race in Arizona, could wind up with a seat on the committee given her role on HFSC. With Republicans still at the helm, the Committee looks set to continue its confirmations agenda as well as push for a fast implementation of S. 2155.

Tax Policy

During the president’s post-midterm press conference on November 7, he highlighted some legislative areas where he may be willing to work with a Democratic House.  One of those areas was tax policy. In response to a question at Wednesday’s press conference about how he’d pay for his promised 10 percent tax cut on middle-income households, the President said, “if Democrats come up with an idea for tax cuts, which I am a big believer in tax cuts, I would absolutely pursue something, even if it means some adjustments.”

While the news cycle will focus mainly on the oversight that is sure to come, as well as the messaging bills that will be introduced, the main area in fiscal policy to watch will be the possible 10 percent tax break for middle class households. The main question now is how Democrats will propose to pay for the cut. Some have proposed bills to expand the Earned Income Tax Credit, financing an increase in the program with tax increases on corporations and big businesses.

The policy areas Democrats could mine here would be expanding tax breaks for retirement savings programs, healthcare, and tuition, but many seem to be skeptical of a major overhaul like we saw in the 115th Congress. We can expect several messaging bills and potentially some technical corrections to the Tax Cuts and Jobs Act (TCJA), but it is unlikely that much will pass the Senate, let alone the president’s veto.

Political Reform

Political reform and oversight will be at the top of the agenda for Democrats in Congress come January.  A large majority of Democratic challengers, several of whom will now move into junior roles in the House, made political reform a key platform item on the campaign trail, with almost 200 progressive candidates rejecting corporate PAC money this cycle.

In the 115th Congress, House and Senate Democrats developed a plan entitled “A Better Deal for Our Democracy” (BDD). They managed to tuck some BDD provisions into the spending bill in bipartisan areas like rural broadband access, child care assistance, and infrastructure improvement. In August, the week that Paul Manafort was convicted on eight counts of fraud, Sen. Warren introduced an anti-corruption bill that proposes toughening rules on conflict-of-interest, lobbying ethics, and campaign finance reform. In the Republican-controlled Senate, Warren’s bill has little-to-no-chance of passing. House Democrats, however, are making democracy reform their number one priority in January.

On Monday, Rep. Sarbanes (D-MD) announced that H.R. 1, the first vote in the House, will be a reform package removing obstacles to voting, closing loopholes in government ethics law, and reducing the influence of political money. H.R. 1 would establish automatic voter registration, shift redistricting power from states to independent commissions, overturn the Supreme Court’s Citizens United ruling, expand disclosure mandates, and establish public financing to match small contributions.  Rep. Sarbanes admits that though the bill is unlikely to pass the Senate, it will force political reform issues to the forefront of the legislative agenda for both chambers of Congress.

Other Policy Areas of Note

There are a few issues that emerged as major talking points during this election season that we should keep an eye on moving forward:

  • Infrastructure

Infrastructure spending appears to be the best hope for a bipartisan bill in the coming Congress.  Both parties and the president publicly seem to agree that fixing and modernizing America’s infrastructure is a high priority and point of cooperation. This issue has been ongoing for years because a key source of infrastructure funding, the federal gas tax, has not been raised or adjusted for inflation in the last 25 years. President Trump has voiced support for raising the tax, in addition to signing onto a comprehensive spending package, but it remains to be seen if any infrastructure bill will come to fruition. Many observers believe that the two parties are so far apart on key aspects of an infrastructure package that the likely outcome is no bill at all or only a modest one that falls well short of the nation’s infrastructure needs.

  • Education

Many Democratic candidates campaigned on improving education at the K-12 and university levels. For K-12 public education, the focus was mainly on increasing funding in general. At the university level, many candidates advocated for reducing the costs of a four-year degree and increasing options for job training programs. With Secretary Betsy DeVos at the head, national changes seem unlikely, but newly elected Dems can work within their districts to improve local public schools and universities.

  • Healthcare

Healthcare was a cornerstone of both Democratic and Republican platforms this cycle. Democratic victories in the House will, at the very minimum, mean that further attempts to repeal the ACA will be stopped. It is possible that we will see some proposals pass through the House, with select GOP support, calling for modest expansions in Medicare. There is also likely to be an emphasis on increased protections for the ACA, primarily through oversight rather than legislation. With the Senate firmly locked down by the GOP, it is unlikely that substantial overhauls will be adopted this term.

In the end, it is not clear whether the midterm elections this year saw a true “blue wave” or more of a harbinger of still greater things. The loss of seats in the Senate — all but inevitable given the map, which reverses and favors Democrats in 2020 and 2022 — somewhat obscures the fact that Democrats might end up with their biggest gain in the House since the post-Watergate election of 1974.  This resounding win will mean that Democrats have a strong mandate to press ahead with much needed reforms, forge a progressive agenda to challenge the current GOP status quo, and chart a path to 2020.

If Charity Begins at Home (Apr. 27)

Update 267 — If Charity Begins at Home,
Tell it to the Congressional Majority First

This month marks the fiftieth anniversary of the Fair Housing Act’s signing.  That landmark Act authorized the Department of Housing and Urban Development (HUD) to limit discrimination in housing.  While HUD has helped millions of Americans find stable, affordable housing, millions of others face crisis conditions in the housing market and housing discrimination persists as a problem for many minority communities.

Republicans in Congress and the administration are attempting to worsen already difficult circumstances for those without secure housing.  Now comes HUD Secretary Carson with the helpful idea of tripling rents. We provide an overview of less novel legislative and administrative developments on the housing market and housing finance below.

Good weekends, all.

Best,

Dana

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Context: Continued Crisis Conditions

The foreclosure crisis plunged national homeownership to new lows.  In the aftermath, millions of Americans still face draining housing expenses.  In many parts of the country, these pressures have yet to abate at all. For over 11 million Americans, rental payments take up more than half their paycheck.  2.5 million Americans annually are evicted and pushed out of the communities in which they work.

Mortgage rate costs are putting homeownership out of reach for too many, a problem that is felt particularly acutely in communities of color.  Increasing numbers of Americans are being forced to leave home and find a place, whether with family members, friends, in cars, or on the street.

All of this occurs in the context of drastic resource shortages.  Of the $200 billion in federal resources devoted to all housing programs, only $50 billion goes to low-income families.  Just a quarter of those who qualify for Section 8 public housing support ultimately receive it.

Fannie Mae and Freddie Mac, the  government-sponsored enterprises responsible for housing finance, have been held under Federal conservatorship since the financial crisis, when they carried $5 trillion in mortgage-backed securities and debt on their balance sheets. Negotiations have long been underway to end this conservatorship and determine the structure of a new guarantee.

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Senate Hurting Low-Income Borrowers?

Legislative action by this given Congress could only put low-income people into a deeper bind.  While S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act was touted as helping the little guy, a look at its provisions reveals the bill is a gift to banks that turns a blind eye to practices that harm financially vulnerable borrowers.

S.2155 – A handful of provisions in S.2155 reintroduce risk to the housing market by:

• Permitting steering by manufactured-home companies to affiliated lenders, increasing cost and risk to financially vulnerable borrowers.
• Eliminating escrow requirements for high-cost mortgages made by banks with assets between $2 billion and $10 billion, removing a protection designed to prevent the likelihood a borrower loses their home due to an unpaid tax lien.
• Exempting loans held in portfolio by these same banks from Qualified Mortgage requirements (they would no longer have to assess a borrower’s ability to repay).
• Exempting 85 percent of lenders from having to report the age, credit scores, and racial and ethnic breakdowns of borrowers. This would end a protection that prevents borrowers from being overcharged or discriminated against.
• Ending appraisal rules for high-risk mortgages in rural areas, introducing risks for rural borrowers.

GSE Reform — Senate Banking Committee members have been working for some time on a Government-Sponsored Enterprise (GSE) reform package that differs from the Federal Housing Finance Agency recommendations.  Legislative time before the midterms is likely too short for Congress to craft a genuine bipartisan deal on GSE but here are the issues at the core of the negotiations:

Building on a 2014 bill passed by the Senate Banking Committee, the Senate agreement that leaked earlier this spring would place Fannie Mae and Freddie Mac into receivership and repeal their charters to replace them with 10 private market guarantors.  The 2014 bill:

• Created the FMIC to ensure continued, widespread availability of an affordable mortgage rate, such as the 30 year fixed-rate mortgage.
• Set eligibility at a credit score around 750 and a 30-year fixed rate mortgage in which borrowers achieve an 80 percent loan-to-value ratio.
• Note: less than 50% of Americans have a credit score that qualifies them.

The deal introduced now would eliminate affordable housing goals in favor of an incentive system to encourage lending to low-and middle-income borrowers.  In addition, Republicans and Secretary Mnuchin have affirmed the importance of the 30-year mortgage, Sen. Warren has said she will not support a housing finance reform unless “it addresses the affordable housing crisis in this country.”

The specifics of the Senate Banking GSE reform package are:

• The 10 private-guarantors model differs from FHFA model, which recommends a limited number of guarantors.
• The agreement would turn these institutions into utilities with access to an explicit government guarantee against catastrophic loss.
• Tension exists regarding affordable housing concepts of “duty to serve” as opposed to a “mortgage assistance fee approach.”  A mortgage assistance fee is the conservative alternative to the Agencies’ mandate to serve underserved areas.

Secretary Carson’s Rent Hike

On Wednesday, Housing and Urban Development (HUD) Secretary Ben Carson, introduced a sweeping housing subsidy reform. This follows the executive order that President Trump signed earlier this month directing federal agencies to expand work requirements for low-income Americans receiving Medicaid, food stamps, public housing benefits and welfare. The administration cynically dubbed these administrative efforts “Welfare Reform 2.0.”

Sec. Carson’s initiative would raise rent for tenants in subsidized housing to 35 percent of gross income, up from the current standard of 30 percent of adjusted income. HUD officials estimate that about half of the 4.7 million families receiving housing benefits would be affected by this change. In some cases, rent for the nation’s poorest families would triple, increasing from a minimum of $50 per month to $150 per month.

This increase, which HUD argues is necessary to streamline its operations, would amount to about $3.2 billion in slashed benefits from the rent increase. This rediscovered Republican concern with spending rings hollow in the wake of their $1.5 trillion tax giveaway to corporations and the ultra wealthy. To the GOP, deficits are only a concern when they benefit the country’s most vulnerable.

HUD’s Rampage on Rental Assistance

While Sec. Carson is busy raising the financial burden on the most vulnerable Americans, he has been derelict in his duty to execute legislation that has been passed by Congress. Most notably, Carson is delaying the implementation of the Housing Opportunity Through Modernization Act of 2016 (HOTMA), which was passed with bipartisan support. The measure would streamline the formulas for calculating rents, deductions, and other factors for housing aid, ensuring that rental assistance continues to make housing affordable for low income families.

The House Joins In

Carson’s delayed implementation of HOTMA provisions buys time for congressional Republicans to undercut the act. On Wednesday, a House Financial Services, Housing Subcommittee hearing was held to discuss draft legislation, the Promoting Resident Opportunity through Rent Reform Act (PROTRRA). PROTRRA would significantly weaken housing choice vouchers and sweep aside many HOTMA reforms by creating a tiered rental system that could raise minimum rent 11 times higher than under current law.

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Looking Ahead through the Midterms

Democrats have developed proposals around housing that they can campaign on this fall. Last year, Rep. Ellison introduced the  Common Sense Housing Investment Act. This legislation would change the mortgage interest deduction to a 15 percent credit and increase the amount of homeowners who receive the credit from 43 million to 60 million. The bill lowers the deductible cap on allowed interest expense paid on a mortgage from $1 million to $500,000, which would help to ensure that wealthy homeowners no longer get such disproportionate favored treatment.

It is unlikely that significant housing legislation will advance during this Congress. Republican GSE reform seems to be on the back burner while housing programs passed by the House are redundant next to Sec. Carson’s actions to triple rental costs.  With housing facing a severe crisis, Republican leadership makes itself vulnerable as voters weigh the impact of their policies.

GOP Double-Down Hair-Doo (Apr. 17)

Update 264 — GOP Double-Down Hair-Doo:


Liked the Tax Cut?  How about a Perm?
While today marks the last day Americans will file their taxes under the old tax code, a number of Americans have already seen their paychecks influenced by lower tax withholdings.  Republicans wasted little time celebrating the Tax Cuts and Jobs Act (TCJA) before turning to tax reform 2.0 — the next round of tax cuts.
On the theory that nothing succeeds like success, the GOP seems to be staging a sequel.  What does entail substantively and will Americans want to see this movie again. And again…?

Best,

Dana

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Tax Cuts Round Two

Lead by Rep. Mark Meadows, Chair of the House Freedom Caucus, Republican leadership is grating up a “phase two” of tax slashing in anticipation of the upcoming midterm elections.  This tax cut 2.0 is likely to be rolled out on two fronts: individual permanence and the indexing of capital gains.

Individual Permanence

The TCJA was a massive restructuring of the American tax code that significantly cut corporate taxes and provided more modest relief for individual filers.  Because no Democrats could be sold on it, the GOP had to pass the tax Act along party lines through the reconciliation process. Using reconciliation required tax drafters to adhere to the Byrd rule and ensure that their legislation did not add to the deficit beyond a ten-year window.

Making the individual tax cuts permanent would cost approximately $1.5 trillion in the decade after 2025.  Republicans hope this maneuver will put Democrats in an awkward position come November, because allowing the cuts to expire in 2025 would see the bottom 80 percent of income earners paying higher taxes than if the law had never passed in the first place (see more below).  This is a dangerous political game, however, as such a ploy would double the cost of the TCJA and further balloon the deficit.

Indexing Capital Gains

Beyond individual rate permanence, Republicans also seek to reduce the capital gains rate in a second round of tax cuts.  One initiative spearheaded by Sen. Ted Cruz would deflate capital gains for inflation. GOP lawmakers have long sought to slash the capital gains rate in the name of increasing investment.  But Trump railed against the preference on the campaign trail. National Economic Council Director Larry Kudlow has gone so far as to argue that the President could index capital gains via executive order.

Such an effort would only serve to make the Republican tax reform effort less equitable. According to the Tax Policy Center, nearly two-thirds of the gains from the Tax Cuts and Jobs Act will accrue to the top 20 percent of earners.  Increasing the preference on capital gains will double down on this upward redistribution because nearly 70 percent of all capital gains income is claimed by households making at least $1 million.

Gratuitous, if Deficit-Financed, Stimulus

CBO estimated this month that the country will hit trillion-dollar annual deficits by 2020, mostly thanks to Republican tax efforts and the recently passed omnibus.  Many economists view this level of stimulus as risky given where we are in the business cycle. The Fed is likely to continue to raise interest rates as the unemployment rate hits four percent, and rising debt combined with rising interest rates means rising interest costs.

The GOP has already started deflecting blame for its fiscal profligacy, with House Ways and Means Chair Kevin Brady claiming that “we don’t have a revenue problem in Washington, we have a spending problem.”  Brady then pointed to entitlement spending as an example of out-of-control spending, an indication that Republicans plan on making the middle class pay for their tax cuts twice – straddling future generations with huge deficits, and contemporary ones with entitlement cuts.

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Politics of Tax 2.0

GOP Fecklessness — This new round of tax cuts is additional evidence of a fundamental truth: it is in the Republican DNA to cut taxes.  The GOP has shown that its fiscal hawkishness during the Obama administration was nothing more than a political ruse.  Since assuming power they championed tax legislation that will increase the debt by $1.5 trillion over a decade and next negotiated a spending Act that will bring the deficit to $1 trillion in the next fiscal year.  All told CBO expects the debt to balloon to $33 trillion by fiscal 2028.

Legislation in the Works — Legislation to make individual rate cuts permanent has been introduced in both houses.  Senator Ted Cruz introduced a Senate bill to this effect, while Congressman Rodney Davis introduced a House version that makes pass-through rates permanent in addition to individual rates.  Republicans will use this legislation to chide Democratic candidates who decried the fact that the TCJA’s made corporate cuts permanent while setting individual cuts expiration date at 2025.  GOP leadership will suggest this is the Democrats’ opportunity to support making individual rates permanent. Don’t expect Democrats to bite.

The Democrats’ Take — Democrats are currently not going to support anything that does not fix more fundamental problems with the TCJA.  As Rep. Lloyd Doggett, member of the Ways and Means Committee, stated, the Republican proposals only “will make this debt situation even worse.” Senate Democrats have introduced legislation to roll back major parts of the TJCA.

Tax Plays Into Midterms

The push for a second round of tax cuts is nothing more than a political re-run in an election year.  As in the first round, Republicans did not involve Democrats in these talks. While they did not need Democratic support to pass the original TCJA, they need 60 votes this time around – a threshold they surely will not clear.  In short, Republicans always knew individual rate cuts would expire while corporate cuts would be permanent.

Nevertheless, polling trends indicate Democrats should prepare for the tax cuts’ growing popularity.  In December, the TCJA polled poorly, with just 33 percent approving. By January, that figure had increased to 46 percent approving somewhat or strongly.  February polls revealed a shrinking Democratic lead in generic Congressional control surveys alongside approval ratings for the TCJA reaching over 50 percent.  Since February, approval for the Act has leveled off marginally, with just four in ten Americans saying they like it.

By reopening the tax debate, Republicans run the risk of suffering the consequences after a winter where they were viewed as doing the bidding of the wealthiest.  It is hard to know which direction public opinion on taxes will go after tax day, but as always, but it is unlikely the Act will be resoundingly popular and a fair chance it may be associated with voters with entitlement reform and retirement insecurity.

Trump Tax Plan: Billionaire’s Bounty (Aug. 19)

Mike & Co.,
 
As Donald Trump continues the drawn-out process of providing details of his tax agenda, it has become abundantly clear that his plan stands to benefit the rich at the expense of lower- and middle-class Americans.  Even more audacious — he  appears to be running with three Achilles heels: the Trump loophole, whereby pass-through companies qualify for a reduced corporate rate; the repeal of the estate tax; and the combination of business interest deduction and expensing.

The below analyzes each of the three proposals and their impact on Trump and other wealthy Americans.  We can only estimate how many billions of dollars Trump stands to gain from his own tax plan as he has yet to release his tax returns but it’s not chump change. 

I hope this finds you headed for a weekend with at least some time out of the office.

Best,

Dana

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The Trump Loophole

• Pass-Through Relief for the Wealthy

Arguably the largest, Achilles heel in the tax plan is the so-called “Trump Loophole,” his proposal to reduce the top marginal corporate tax rate from 35 percent to 15 percent.  Under the Trump plan, pass-through entities would qualify for the corporate rate, instead of paying a much higher individual rate.  This is a boon for the wealthy who can report large portions, if not all, of their income as “business income” thereby avoid the higher rates faced by average Americans earning wages and salaries. 

This loophole has largely emerged due to the large reduction of the top marginal corporate rate, without a similar decrease of the top individual rate.  Such discrepancies between the individual and corporate tax codes is “practically a recipe for tax avoidance.”  And while many small businesses are pass-through organizations, at present approximately 70 percent of pass-through income goes to the top one percent of earners.   

•  Benefit to Trump Inc.

Trump’s organizations would stand to gain from this proposal,l and his total tax burden, whatever it may be, would likely be cut in half, though it cannot be confirmed without his tax returns.  Nevertheless, Trump himself has stated, “a lot of the rich are benefitting because of the reduced taxes for businesses.”  Under Trump’s plan, the rich would benefit even more, particularly due to this unchecked loophole.  

As this is a problem of the House Republican tax plan as well, some Republican staffers have acknowledged the problematic situation and are looking into ways to address it.  One idea in the works is a prevention of personal service income from receiving the low corporate rate.  However, Trump and his campaign aides are not seeking to change this provision and any changes in the House Republican plan would not necessarily be reflected in the Trump plan.

 The Estate Tax

•  Relief for the Wealthiest

 A second component of Trump’s plan that conspicuously favors the rich is his proposed repeal of the estate tax.  Trump has called the tax, which applies to estates over $5.45 million for individuals and $10.9 million for couples, “just plain wrong.”  It affects the estates of 0.2 percent of Americans who die each year.  

Trump himself would stand to benefit greatly from such a repeal.  Assuming Trump is worth his stated estimate of over $10 billion, it is likely a 40 percent tax would be assessed on his estate upon the death of both Trump and his wife.  As a result, eliminating the estate tax would save the Trump family approximately $4 billion. 

This $4 billion could be used for a plethora of other efforts, to the benefit of lower- and middle-class Americans.  But a repeal of the estate tax would solely benefit the wealthiest, and the $4 billion would instead continue to go towards the “successful” endeavors of the Trump family. 

•   Benefit to Trump Inc.

Unfortunately, without Trump’s tax returns, it is difficult to determine Trump’s exact net worth.  Bloomberg News has estimated his worth to be far less than $10 billion, at approximately $3 billion instead.  This decreased net worth would result in approximately $1.2 billion in estate tax revenue. 

A Poisonous Combination

•  Interest Deduction Plus Expensing

A third weakness of Trump’s plan is in fact a combination of two policies: continuing to allow businesses to deduct interest, and at the same time permitting immediate write-offs, or expensing, for investment in equipment and buildings.  

Under the first policy, businesses can deduct all interest paid on debts from their tax burden each year.  The proposal to allow expensing on investment deviates from current law, which requires businesses to spread deductions on investments in equipment and buildings over multiple years.  By including both policies in the same plan, Trump would provide negative tax rates for investments financed with debt.  

 This practice could incentivize companies to engage in projects that, without these tax breaks, would no longer be economically beneficial in terms of profits. In essence a business could take high losses in the first year of an investment, while creating ongoing interest deductions.  These losses could then be carried forward and used to offset income in the future.  

• Bipartisan Opposition

NYU law professor and former Obama advisor Lily Batchelder described this policy combination as“insane,” noting that it could “convert the tax code into a direct spending program” for all spending classified as debt-financed business investment. Republican economist Douglas Holtz-Eakin has expressed his confusion over Trump’s reluctance to pair expensing with a termination of interest deductions, calling the union “very weird.”  Alan Viard of the American Enterprise Institute also labeled this generous treatment of businesses as “excessive.”  

• Real Estate Relief

As real estate is one of the sectors that would stand to benefit greatly from such a policy arrangement, Trump would once again be manipulating the tax code to suit his financial interests, and those of his wealthy peers.  As the self-proclaimed “king of debt,” this two policies taken together could allow him to continue to engage in questionable projects and investments. 

While Trump has yet to officially release both policies as part of this tax agenda, he has in the past stated his support for full expensing and his reluctance to eliminate interest deductions.  

 • Benefit to Trump Inc. 

 Estimates for how much Trump would save based on this toxic combination are once again difficult to quantify without information from his tax returns.  But, as those who stand most to benefit in general are those in real estate with high utilization of debt, Trump looks like a prime candidate to reap the rewards.  

Renewed Push for Tax Return Release

Democrats may address Trump’s failure to release his tax to the Senate in September.  Senate Finance Ranking Member Wyden proposed legislation in May requiring major-party presidential nominees to disclose at least three years of tax returns within 15 days of becoming the official nominee.  Should a nominee refuse to release his returns, the Treasury Department would be permitted to disclose them instead.  

Yesterday, Sen. Wyden and Chris Murphy both stated their intention to push for consideration of the bill on the Senate floor. Sen. Wyden also noted that the Finance Committee routinely seeks the view three years of tax returns as part of their confirmation process for executive branch nominees.  It is unlikely as of now that Majority Leader McConnell will allow this bill to receive floor consideration but stranger things have happened this year. 

Counterprogramming Trump on Taxes (July 21)

Mike & Co.,
In a couple of hours, when Donald Trump takes the stage in Cleveland in a couple of hours to accept the GOP presidential nomination, it’s a good bet he won’t say much about his tax plan.  With good reason: he doesn’t have one.

Yesterday, Trump’s campaign announced  that the candidate is preparing a new tax plan, featuring new taxes on the wealthy and no deficits.  Advisors said specifics have yet to be finalized — the plan isn’t expected to be formally released for weeks after Trump is nominated. 

Below we analyze the details of the new plan available, compare it to Trump’s original proposal, and imagine its reception in the next Congress.

Best,

Dana

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Take Two on Taxes

After releasing a tax plan during the primary campaign with tax cuts that dwarf the GHW Bush cuts of 2001 and 2003, loading trillions onto the national debt, Trump is tacking toward fiscal reality.  Per estimates by the Tax Foundation, the next plan will cost at least $3 trillion over the next decade; his original plan cost $10 trillion.  

Trump advisors reportedly made “tough decisions” on which tax breaks to keep in order to reduce the cost by $7 trillion, and a number of deductions presently enjoyed by wealthy Americans have been eliminated.  They have indicated that the plan will resemble House Speaker Paul Ryan’s recent proposal. Says one, there’s “not a heck of a lot of daylight” between the two proposals.  House Ways and Means Chair Kevin Brady described the plans as “kissing cousins.”  Both plans would reduce the corporate rate to 20 percent, as opposed to Trump’s original 15 percent.  The new tax agenda will reportedly feature a top individual rate of between 30 and 33 percent, higher than the original 25 percent, and in line with Ryan’s proposed 33 percent.  

The new plan is expected to be unveiled a few weeks after the Republican Convention in a speech at the Detroit Economic Club, though a date has yet to be officially announced. 

The revision is seen as an effort to attract support from Congressional Republicans, many of whom have been reluctant to endorse the candidate. Allegedly included in the proposal is a tax credit for children and families similar to one supported by Sen. Rubio in his campaign, supposedly part of framing the plan as beneficial for the middle class.  

 The Original Plan

Trump’s original tax plan would have made sweeping changes to the individual and corporate codes.  The seven tax brackets on the individual side would be collapsed into three, with the top bracket cut from 39.6 to 25 percent.  The standard deduction would be raised to $25,000 for single filers and $50,000 for joint filers.  It would repeal the alternative minimum tax and estate tax, reduce the corporate rate to 15 percent, and impose a tax of up to 10 percent on repatriated revenue.  It would eliminate the 3.8 percent net investment income tax on people with incomes over $200,000, a tax  paying for the Affordable Care Act.  

The Trump campaign website describes his original tax plan as “revenue neutral” with numerous pay-fors, including a reduction in loopholes and deductions for the very rich.  The Tax Policy Center has concluded the proposed loopholes are “nowhere near enough” to overcome the tax-rate cuts, hence the significant costs over a decade.  

An analysis of the original plan and overall economic agenda by Moody’s Analytics found it “fiscally unsound,” resulting in “very large deficits and a much higher debt load.”  It predicted a lengthy recession, enormous job losses, higher interest rates, increased unemployment, a plummeting stock market, reduced long-term growth opportunities, and a “diminished” U.S. economy.  

In May, in repeated interviews, Trump stated his belief that taxes on the wealthiest Americans should be increased, albeit slightly.  However, when later pressured for details, he revealed this “increase” pertained not to current rates, but the rates proposed in his original plan, which are far lower than under present law.  If this intention holds true in his new plan, taxes on the wealthy would still be lower under Trump, assuming the candidate doesn’t change his mind again.

 Personal Profit

It would appear that Trump himself stands to gain a large sum of money as a result of his tax plan.  According to one estimate, the Trump family would gain a tax cut of $7.1 billion.  Such an estimate is necessarily speculative — Trump has shown no evidence that he has paid taxes in nearly forty years.

Looking Forward

No matter what the election outcome, it won’t be easy for Congress to pass a major tax bill in 2017.   

Both Trump and House Republican leadership have stressed their intention to prioritize tax reform, with Chairman Brady noting his preparation for a vote on tax reform in 2017.   But the GOP may not control Congress next year and willy-nilly there is nothing close to consensus on comprehensive reform.  Conservatives will insist on paying for it in full; progressives will emphasize increasing taxes on the wealthiest Americans.  On the corporate side, multinational corporations will lobby for a revised system, with a top rate of no higher than 25 percent and favorable terms for dividend repatriation.  Small businesses will push for equal treatment.  Put all of that together, and you have a very expensive bill that probably can’t pass.  

We don’t know what the tax reform landscape like in 2017, but as the primary campaign and this week’s convention show, tax policy though traditionally a headline GOP issue, has been particularly muted this year.  This may reflect not only Trump’s uncertainty about his revised plan but also an abatement of the popular ardor for tax cuts in recent decades.  Americans may have recognized that tax cuts are not an optimal solution, given the devastation of public services, the further crumbling of an unreliable infrastructure, and exacerbated inequality wrought by the recent recession.

House GOP Tax Reform Plan (June 27)

Mike & Co. —

Last week, the House GOP capped off a month of policy events, announcing a new tax reform plan.  The  proposal is aimed not only at getting the fractious caucus on the same page on an issue long a top GOP priority but also at creating some space between Congressional  Republicans and the party’s presidential nominee to insulate the former against the latter.

No official scoring has been offered estimating the cost of the tax plan, though the authors say they are aiming for revenue neutrality.  The plan is part of Speaker Ryan’s A Better Way policy platform, which includes plans to address poverty, security, health care, and the economy.  While many of its proposals are what you’d expect from a GOP tax plan, some new proposals have made the cut this time around.

What’s in it and what should we expect next?

Best,

Dana

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 Business Tax Proposals

  •  Cut corporate tax rate: The corporate tax rate will be lowered from 35 to 20 percentwhile small businesses will pay 25 percent.
  •  Adopt a territorial tax system: Corporations will not pay taxes on income earned overseas.
  •  Move to a “cash flow” based tax system:  A popular idea among conservative circles, the plan embraces taxes against cash flow as opposed to income.
  •  Allow the immediate expensing of capital investment:This will likely come at the cost of the interest payment deduction for businesses.

Individual Tax Proposals

  •  Institute three tax brackets: The top rate of 39.6 percent moves to 33 percent.  Other brackets are 12 and 15 percent.
  •  Increase the standard deduction, child credit, and EITC:  A larger standard deduction takes the place of many itemized deductions and credits, while GOP favorites, like the EITC, charitable contribution credit, and mortgage interest rate deduction will stay.
  • Eliminate the alternative minimum and estate tax: Itwouldn’t be a Republican tax plan without these two taxes on the chopping block.
  •  Cut rates on investment income: Only half of investment income will be included when calculating a person’s taxable income.  That would create a new rate structure of 6 percent, 12.5 percent and 16.5 percent.

New Features

The plan’s top personal income tax rate is set much higher than previous plans, which often contained provisions of 25 percent or less – 33 percent is a major increase from there.  That higher-than-expected rate is likely more than made up for by the plan’s treatment of investment income

Investment income receives a significant boost in the plan. The ability to deduct 50  percent of all investment income from taxable income is meant to encourage Americans to invest and save but will also certainly be a boon to wealthy taxpayers.

On the corporate side, including a consumption-based tax on businesses is novel.  This type of tax most recently made a splash when a number of GOP presidential hopefuls included them in their plans last year, but they have been gaining support in conservative think tanks for some time now.  The same goes for creating a territorial tax system, whereby international earnings are not taxed against American businesses.

Old Chestnuts

The plan’s more favorable treatment of investment income could more than make up for the plan’s 33 percent income tax on the wealthy.  While that top tax bracket is higher than is usually seen in conservative plans, the ability to discount one-half of all investment income is a major benefit for the most affluent.

Conservatives in general, and Ryan specifically, have long called for an increase in the EITC and the child tax credit.  They also defend the home mortgage interest rate deduction and the charitable contribution deduction.  As such it’s not surprising that these tax incentives were singled out for special mention in their tax plan.  What’s missing is a list of all the other bits of tax code that are supposedly being cut to make room for income tax cuts.

Ending the alternative minimum tax and the estate tax are long-standing goals of the GOP and as such are standard in plans like this.  So is the promise to cut out the many itemized deductions and credits available to individuals and businesses alike – a major pillar in the conservative argument for simplifying the tax code.

Corporate vs. Individual Reform

It’s not surprising that the corporate tax system sees more radical changes in this plan.  Proposals to institute a consumption tax, a territorial taxation system, and to eliminate the corporate alternative minimum tax should make many in the business community happy.  One notable exception: corporate real estate companies and asset managers, who stand to lose money if the interest rate deduction is killed.

Despite lacking the bells and whistles of the corporate side of things, individual rate payers haven’t been neglected.  High Investment income treatment and an end to estate taxes are big benefits for them, not to mention a reduction in income taxes (though it’s not as steep a reduction as we’re used to seeing).

The Plan’s Purpose and Prospects

GOP lawmakers say that they’ve learned from the failure of Dave Camp’s 2014 tax plan.  That experience was the impetus behind this much more radical proposal, which likely won’t be fully fleshed out until 2017.  The plan as it stands today amounts to House Republicans’ opening bid in any tax reform effort.

While no scoring has been released yet, the plan reflects familiar GOP imperatives: no tax increases and no deficit increase.  That means it will rely heavily on optimistic dynamic revenue estimates.  On top of these considerations, any plan to “simplify and flatten” the tax code will require a greater level of enforcement to make sure that taxable income is properly collected.  Creating zero new taxes on exports and profits earned overseas will tempt companies to come up with ways to make their income fit either description.  That goes against the plan’s promise to effectively neuter the IRS.

Moving Forward

Republicans have announced this tax plan late in the game for 2016.  And it’s as much a matter of policy as it is of the political reality facing them.  House leadership may be itching to set out a plan that is seen as more reasonable compared to Donald Trump’s $9.5 trillion slash-and-burn proposal. Additionally, they may be trying to set up a gentle glide path toward a compromise on tax reform with Democrats.  Because of that, don’t expect to see much further development on this plan – a scoring should come in the near future, but real legislation probably won’t come with it.