Breaking Down the GOP Tax Bill

House Ways and Means Committee Chairman Kevin Brady and House Republican leaders today introduced HR 1, known as the “Tax Cuts and Jobs Act,” the legislative proposal from which the House and Senate will start to negotiate a final tax package. President Trump expressed strong support for the package. Senate Finance Committee Chairman Orrin Hatch applauded Chairman Brady for his efforts and said that he is working with his Senate colleagues to finalize their proposal and subsequent markup. Though the proposal released today was based on the unified framework agreed upon by the House and Senate Republican leadership and the administration, the process of finalizing an agreed-upon bill for the president to sign will take time.

Highlights of the policies proposed in the bill are available here, a section-by-section summary of the bill is available here, and the full legislative text is available here. Key provisions include a 20 percent corporate tax rate, a 25 percent tax rate for pass-through entities, five years of full expensing, and a limit of the corporate interest deduction to 30 percent of a business’s EBITDA.

The BUILD Coalition, of which ACG is a member, released a statement in response to the proposal’s release.

“Placing a limitation on the deduction of interest expense—a normal cost of doing business—amounts to a new tax on American job creators who borrow to invest and grow. This policy change would harm the global competitiveness of businesses across all sectors of the U.S. economy, from manufacturing, to agriculture, to telecommunications and broadband,” said BUILD Coalition spokesman Mac O’Brien, according to the statement.

Chairman Brady will release a revised bill tomorrow, Friday, Nov. 3. While the bill should be similar to what is public today, it may very well change or address provisions not included in the current bill, such as carried interest. The bill is on the schedule for markup in the House Ways and Means Committee on Monday, Nov. 6, and ACG expects markup to take several days. We will keep you updated as changes occur.

The legislation would implement the following changes:

Individual Tax Reform:

• Individual rates: consolidates the current seven tax brackets into four (39.6 percent, 35 percent, 25 percent and 12 percent). Below are the thresholds:

1. 39.6 percent: $1 million for joint filers ($500,000 for individuals)
2. 35 percent: $260,000 for joint filers ($200,000 for individuals)
3. 25 percent: $90,000 for joint filers ($45,000 for individuals)

• Standard deduction: roughly doubles to $12,000 for single filers and $24,000 for joint filers.
• Maintains the earned income tax credit.
• Establishes a new “family credit,” an expanded child tax credit (from $1,000 to $1,600) and a $300 credit for each parent and non-child dependent.
• Maintains the charitable contribution deduction.
• Repeals the state and local tax deduction, but allows taxpayers to continue to write off state and local property taxes up to $10,000.
• Maintains 401(k)s and individual retirement accounts in their current form.
• Repeals the alternative minimum tax.
• Estate tax: immediately doubles the estate tax exemption, with full repeal after six years.
• Mortgage interest deduction: limits the deduction for newly purchased homes to a maximum of $500,000 (down from $1 million).

Business Tax Reform:

• Corporate tax rate: creates a flat corporate tax rate of 20 percent.
• Pass-through entities: lowers the pass-through tax rate to 25 percent.
  • Note: establishes “strong safeguards to distinguish between individual wage income and pass-through business income.”
• Interest deduction: would cap business interest expensing at 30 percent of the business’s adjusted taxable income.
  • Note: businesses with average gross receipts of $25 million or less, and certain real estate businesses and public utilities, would be exempt. If exempted, they will be ineligible for full expensing.
• Full expensing: temporary and immediate full business expensing, with a five-year sunset.
• Expansion of Section 179 expensing: would increase the small business expensing limitation under Section 179 to $5 million (from $500,000) with a phase-out amount of $20 million (from $2 million).
• Preserves the R&D credit and low-income housing tax credit.

International Tax Reform:

• Transition towards a territorial tax system.
• A repatriation tax of foreign earnings at lower rates of 12 percent for cash and 5 percent for illiquid assets, with an option to spread the tax liability over a period of eight years.
• Base erosion: an effective minimum tax on foreign earnings of 10 percent.