On April 26, 2017, the Trump Administration held a press briefing to unveil its principles for tax reform. The Administration’s stated goals for tax reform include tax code simplification, stimulating economic growth, providing tax relief to middle-income taxpayers, and reducing the business tax rate. Key components of the principles are:
- Reduction of the business tax rate to 15 percent, from the current top corporate rate of 35 percent and flow-through rate of 39.6 percent
- A move to a territorial-based system of taxation, which is much more common around the world than the current U.S. system of worldwide taxation
- A one-time tax on repatriation of overseas earnings held by foreign subsidiaries of U.S. companies
- Elimination of special interest tax breaks
- Reduction of individual income tax brackets from seven down to three: 10 percent, 25 percent, and 35 percent
- Doubling of the standard deduction
- Increase in tax credits for child care and dependent care expenses
- Elimination of itemized deductions other than mortgage interest and charitable contributions
- Repeal the Alternative Minimum Tax
- Repeal the Estate Tax
- Repeal the 3.8 percent Net Investment Income Tax, which will effectively reduce the top tax rate on long-term capital gains to 20 percent.
The principles are generally consistent with tax-reform proposals touted by then-Presidential Candidate Trump in the fall of 2016. The principles also share some similarities with the Congressional Republicans Better Way Tax Reform Blueprint that was published in June 2016.
The Administration’s objective is for Congress to generate and pass tax legislation that receives bipartisan support and meets the stated goals above. To that end, the Administration intends to hold listening sessions with stakeholders over the next month, and to work closely with Congress throughout the process. The Trump Administration’s goal is to have tax reform legislation signed into law later this year.
While unveiling the principles may be viewed as a sign that President Trump and Congressional Republicans are serious about tax reform, there is a long way to go before tax reform becomes a reality. To begin with, there are several unanswered questions about the principles themselves, such as: what business tax breaks will survive, what tax rate will apply to repatriations, and what income ranges are subject to the 10 and 25 percent individual income tax rates, to name a few. Once these questions are answered, and as the principles are further refined throughout the process, it is unclear what the cost of tax reform will be.
Treasury Secretary Mnuchin said at the press briefing that “most” of the cost will be offset by economic growth. However, preliminary estimates of the cost of tax reform by third-party organizations put the estimated cost between $3 trillion and $7 trillion over the next decade. The Administration is likely to face opposition from both Democrats and Republicans if the cost of tax reform is viewed as too high. In the Senate, tax-reform legislation can be passed without approval from Senate Democrats through budget reconciliation procedures; however, legislation passed in this manner cannot create deficits beyond the 10-year budget window. This may mean that tax reform has to sunset, or end, after 10 years, as was the case with 2001 and 2003 tax cuts.
Another consideration is how tax reform will be coordinated with health care reform. After House Republicans were unable to secure enough votes for health care reform legislation in March, the president had announced that tax reform would move ahead without health care reform. However, there is a renewed focus on health care reform, and so it is possible that health care reform will occur first, and that efforts by Congressional Republicans will be focused on that effort before turning to tax reform.
In summary, there are a lot of unanswered questions about what tax reform will ultimately look like, and several policy issues to work through before tax reform becomes a reality. We will publish periodic updates on the status of tax reform as developments unfold. We also welcome the opportunity to speak with you about your tax situation and discuss potential planning ideas to take advantage of when tax reform does occur. For example, in anticipation that tax rates will go down, there may be opportunities to accelerate deductions into a year when the deductions are still available and rates are higher. Similarly, there may be opportunities to defer income recognition until future years when rates may be lower.
Robert Zielinski is a partner based out of our Rochester, NY office.