The U.S. House of Representatives passed its version of a mammoth federal tax reform plan yesterday on what was essentially a party-line vote. The final tally on H.R. 1, the Tax Cuts and Jobs Act (TCJA), was 227 to 205, with all but 13 Republicans voting in favor of the measure and all Democrats voting against it.
The massive overhaul package, which would slash taxes for businesses and corporations and makes numerous tax changes for individuals, would also increase the national debt by up to $1.5 trillion over 10 years.
For individuals, the tax overhaul would compress the current seven tax brackets to four, eliminate personal exemptions and nearly double the standard deduction to $24,000 for a married couple. This means many fewer taxpayers would qualify to itemize their deductions. (The Tax Policy Center, run by the Urban Institute and the Brookings Institution, has estimated the number of tax filers itemizing deductions would drop by three-quarters under the overhaul.) In addition, deductions for state income taxes, medical expenses, tax preparation fees and teachers’ costs for classroom supplies would be eliminated, among others. Deductions for local property taxes would be capped at $10,000. (See Briefing Book on State (and Local) Taxes from the Tax Policy Center.)
The limit on the amount of home mortgage interest that may be deducted would be lowered from $1 million to $500,000 for new loans.
Lobbying groups representing home builders and realtors have argued that changes capping deductions for property taxes and home mortgage interest would reduce the tax benefits of home ownership, resulting in lowering property values. Groups representing retirees and the elderly have objected to the bill’s elimination of the deductibility of serious medical expenses.
Various education groups, including the National School Boards Association (NSBA), have strongly opposed H.R. 1 because of the effect it would have on state and local resources for public education. About one-third of households currently deduct a portion of their state and local property and income or sales taxes. Because over 90 percent of education funding comes from state and local taxes, this federal tax benefit indirectly helps states and districts to finance education.
In particular, education groups have opposed limiting the deductibility of property tax payments, and eliminating the deductibility of income taxes paid to state and local governments, fearing that this will increase tax bills for taxpayers who currently itemize their deductions but would now lose this tax benefit. That, in turn, could make it harder to increase state and local revenues for school operations and infrastructure.
Public education advocates, including the NSBA, have also opposed H.R. 1 because it would expand the uses of Coverdell education savings accounts by allowing them to cover tuition costs for private elementary and secondary schools. In addition, the NSBA has expressed concern that the reform plan would eliminate municipal bond programs that help school districts and communities finance school infrastructure in a cost-effective manner. Finally, H.R. 1 would eliminate the $250 deduction available to teachers who augment instructional materials and classroom supplies with their personal funds.
The Senate version of the tax reform bill would end deductions for all state and local taxes and the Senate is expected face more problems trying to pass its version of the bill than the House did. Nevertheless, the ball is rolling in the Senate as well and a full Senate vote is expected shortly after the Senate returns from its Thanksgiving recess.
The Senate Committee on Finance concluded a series of hearings this week on its version of the Tax Cuts and Jobs Act. The committee voted along party lines last night to report the measure out of committee. The next step will be to convert the committee’s agreement (known technically as the modified “chairman’s mark”) into legislative text, which must then be reviewed by the Senate parliamentarian to ensure compliance with budget reconciliation rules.
That step is necessary in order for the measure to be approved with a simple majority vote, thus nullifying the ability of opponents to use the Filibuster to stall the measure. (See previous post.) According the NSBA, reports indicate that Senate tax reform plan will likely be combined with pending legislation on oil and natural gas drilling in Alaska before the entire tax package heads to the floor.
Assuming Senate passage, the two bills will need to be blended together in a conference committee. The goal of the conference negotiations would be to produce a compromise version. That compromise version would allow both houses to pass the tax reform measure in identical language so it could be sent to the president for his signature.