Capitol to Capitol | Dec. 18, 2017

Tax Bill Headed to Finish Line 

The long road to a major overhaul of the federal tax code is expected to come to an end. What began as a House Republican framework in June 24, 2016, known as “A Better Way,” has culminated into a final bill that is expected to be signed into law by President Donald Trump later this week, giving Republicans in Washington their first major legislative victory of 2017.

DYK?

Christmas wasn’t always festive in the United States. In fact, the Puritan settlers banned the holiday from 1659 to 1681, partly because of theology and partly because of the rowdy celebrations that marked the holiday in the 1600s, and celebrating it could cost you a fine of as much as five shillings. It wasn’t until the 19th century that Americans began to embrace Christmas after they reinvented the holiday and changed it from a raucous carnival holiday into a family-centered day of peace and nostalgia. And, since 1870, Dec. 25 has been a federal holiday in the United States. 

The legislation, The Tax Cuts and Jobs Act (TCJA), H.R. 1, is a $1.5 trillion tax bill that Republicans believe will enhance economic growth in the country by making the business side of the tax code more competitive with the rest of the world. The House is expected to vote on and comfortably pass the plan on Tuesday, followed by the Senate, which is expected to vote on Tuesday or Wednesday. While Republicans can only afford one defection in the Senate, given that Senator John McCain (R-Ariz.) will stay home this week to receive treatment for his brain cancer, the legislation is expected to garner the votes necessary to send the legislation to the president’s desk.

On a static basis, the bill cuts tax revenue by $1.5 trillion over a decade. However, the Joint Committee on Taxation’s dynamic analysis of the bill, which considers how tax reform will impact economic growth, projects that the bill will cost around $1 trillion over 10 years. Nearly three-quarters of the legislation’s cost is in the first five years, after which major provisions of the legislation begin to expire. In fact, other than the reduced corporate tax rate, which was permanently reduced from 35 to 21 percent, most major provisions of TCJA expire after eight years in 2025. If these provisions were made permanent, the 10-year cost of the legislation would be at least $2 trillion and even more beyond 2027, according to the Committee for a Responsible Federal Budget. Many Republicans believe future Congresses will prevent the major provisions of the legislation, including most all of the individual provisions, from expiring. But given the cost of extending them and the looming crisis of the national debt, that might not happen.

The legislation also repeals the Affordable Care Act’s (ACA) individual mandate, which is expected to save the federal government $338 billion over 10 years, but it is estimated that the repeal would lead to 13 million more people without health insurance in 10 years.

And while Republicans will enjoy this much-needed victory, tax experts are uncertain of the long-term effects of the TCJA. In an interview with the Wall Street Journal, Martin Sullivan, chief economist at the nonprofit and nonpartisan Tax Analysts, said that Congress will need to make substantive and technical corrections as problems arise down the road. “It’s just the beginning. It’s a whole new chapter,” he said.

Republicans will be happy to deal with technical changes in the future. For now, they look forward to heading home for the holiday break with a big gift: a major legislative victory.

Overview of Major Individual Provisions

Retains seven brackets, but at reduced rates, including a reduced top marginal rate of 37 percent. 

Individual Income Tax Brackets and Rates | Rate Changes Expire Dec. 31, 2025

 

Current Law

 

TCJA

Rate

Single Return

Joint Return

Rate

Single Return Joint Return

10% >

$0

$0

10% >

$0

$0

15% >

$9,525

$19,050

12% >

$9,525

$19,050

25% >

$38,700

$77,400

22% >

$38,700

$77,400

28% >

$93,700

$156,150

24% >

$82,500

$165,000

33% >

$195,450

$237,950

32% >

$157,500

$315,000

35% >

$424,950

$424,950

35% >

$200,000

$400,000

39.6% >

$426,700

$480,050

37% >

$500,000

$600,000

DYK?

On this day in 1932, The Chicago Bears defeated the Portsmouth Spartans in the first NFL Championship Game.

Since the NFL's first season in 1920, the league title had been awarded to the team with the best regular season record based on winning percentage. In 1932, the Spartans and the Bears tied for first place with 6-1 records. So, for the first time in NFL history, a one-game playoff was held to determine the league champion. Because of snowfall and sub-zero wind chill in Chicago, the game was moved indoors and played at the three-year-old Chicago Stadium on a reduced-size field that measured only 80 yards long and was 30 feet narrower than a normal field.

 

  • Inflation Indexing (made permanent): TCJA indexes the individual income tax provisions to the Chained Consumer Price Index (CPI) measure of inflation rather than Traditional CPI measure in current law. Chained CPI, which proponents argue is a more accurate measure of inflation, calculates inflation as growing more slowly than Traditional CPI. This means cutoffs for tax brackets will rise at a slower pace than they would have under present law, which will result in more households moving into higher tax brackets than they would have been. This is because provisions, such as the standard deduction and the Earned Income Tax Credit (EITC), are indexed to inflation annually and if the index rises more slowly, more salary gets pushed into a higher tax bracket, and the value of deductions and tax credits slowly decreases over time.  According to the Joint Committee on Taxation, chained CPI would increase tax collections by $128.2 billion over the next 10 years.
  • Repeals Health Insurance Mandate (made permanent): Reduces the penalty for not obtaining health insurance to $0, which effectively repeals it.
  • Standard Deduction (modifications expire Dec. 31, 2025): Increases the standard deduction to $12,000 (was $6,500) for single filers and $24,000 (was $13,000) for joint filers, but eliminates the additional standard deduction and the personal exemption.
  • Personal Exemption (modifications expire Dec. 31, 2025): Eliminates personal and dependent exemptions.
  • State and Local Tax (SALT) Deduction (modifications expire Dec. 31, 2025): Retains taxpayers’ abilities to deduct their property taxes and their income or sales taxes, but caps the deduction at $10,000. Moreover, the SALT Deduction is not indexed to inflation, which means that its value will erode over time.
  • Mortgage Interest Deduction (modifications expire Dec. 31, 2025): Retains the mortgage interest deduction but limits it to $750,000 in mortgage debt.
  • Child Tax Credit (modifications expire Dec. 31, 2025): Increases the child tax credit from $1,400 to $2,000. Of the $2,000, $1,400 would be refundable, which means that taxpayers would receive the credit even if their federal income tax liability is zero.
  • Estate Tax (modifications expire Dec. 31, 2025): Doubles the estate tax exemption from $5.5 million to $11 million for individuals, and from $11 million to $22 million for joint filers.
  • Alternative Minimum Tax (AMT) (modifications expire Dec. 31, 2025): Retains the AMT but increases the exemption for individuals and joint filers.
  • 529 Deduction: Expands the use of 529 accounts to cover tuition for K-12 students who are homeschooled or attend private schools.
  • Above the Line Deductions: Repeals the moving expense deduction (except for active duty military personnel) and eliminates the alimony deduction effective 2019 (though those receiving alimony no longer count it as income). Retains other above-the-line deductions, including educator expenses and student loan interest. Graduate student tuition waivers also remain in place.

Overview of Major Business Provisions

  • Corporate Income Tax Rates (made permanent): Lowers the marginal Corporate Income Tax Rate from 35 percent to 21 percent. The rate reduction was made permanent on the premise that it would encourage long-term planning for businesses.
  • Corporate Alternative Minimum Tax (AMT) (made permanent): Eliminates the alternative minimum tax for corporations.
  • Pass-Through Businesses (modifications expire Dec. 31, 2025):  Adopts a 20 percent deduction for income of pass through businesses, such as sole proprietorships and partnerships.
  • Expensing: Allows businesses to write-off 100 percent of short-lived capital investment, such as machinery and equipment, for five years, and then phases out the provision over the following five years.
  • International Tax: Moves the United States to a territorial tax system, rather than the worldwide system, at a standard rate of 5 percent of modified taxable income over an amount equal to regular tax liability for the first year, then 10 percent through 2025 and 12.5 percent thereafter, with higher rates for banks.
  • Deemed Repatriation: Enacts deemed repatriation, meaning it is compulsory, of currently deferred foreign profits at a rate of 15.5 percent for liquid assets and 8.0 percent for illiquid assets. The Joint Committee on Taxation (JCT) expects repatriation to generate $339 billion in tax revenue over 10 years.

What Did Not Change?

  • Private Activity Bonds: The final bill does not include a House provision to eliminate tax deductibility of private activity bonds, which are used by state and local governments to fund infrastructure projects.
  • Most ACA Taxes: TCJA does not repeal many taxes that from the Affordable Care Act (ACA), such as the Medical Device Tax or the “Cadillac tax” on high-cost insurance plans. Republicans are trying to address these taxes in separate legislation.
  • Retains the student loan deduction, the medical expense deduction and the graduate student tuition waivers.
  • Retirement Accounts: Retirement accounts such as 401(k) plans stay the same.

NCSL Contacts: Max Behlke, Jake Lestock

Funding Fight May Shutdown Government

With Washington focused on tax reform, it’s important to remember that the federal government runs out of money on Friday at midnight when the two-week funding measure Congress passed on Dec. 8 expires. But while most in Washington expect that a funding deal, if only short term, will ultimately pass, there is a real possibility that the government shuts down this weekend.

The House spending bill, which would increase defense spending and would fund defense through the remainder of the fiscal year while only funding nondefense programs for a few weeks, is ready for a floor vote, but that legislation is all-but-certain to not pass in the Senate. So, it remains to be seen what the final outcome may be, but don’t expect congressional Republicans to return to the spending bill until they finish consideration of their tax legislation.

NCSL Contacts: Max BehlkeJake Lestock

Nomination Hearing for HHS Secretary on Hold

The Senate Committee on Finance was slated to have its confirmation hearing for HHS Secretary Nominee Alex Azar this week with the hope of having a final confirmation vote before the end of the year. With Congress in a rush to finish other items before the year’s end, Azar’s hearing has been postponed, likely until the Senate returns in January.

NCSL Contact: Haley Nicholson

FCC Repeals Net Neutrality

The Federal Communications Commission (FCC) voted last Thursday along party lines on the Restoring Internet Freedom Order, which repealed the 2015 Title II protection for net neutrality. Net neutrality rules required internet service providers (ISPs) to treat all web traffic equally. This means that ISPs could not: block users from certain websites, artificially slow speeds to specific websites, or require websites to pay to have their internet speeds prioritized.

DYK?

Washington, D.C., is obviously named, in part, for the first president of the United States. But what are the origins of the “District of Columbia”?

In 1790, Congress passed the Residence Act, which not only selected the site of the nation’s capital, it gave the president the authority to appoint three commissioners to oversee the federal city’s development. In September 1791, the commissioners named the new city in honor of Washington and dubbed the district in which it was located the Territory of Columbia. The name Columbia, derived from explorer Christopher Columbus, was used during the American Revolution era as a patriotic reference for the United States. In 1871, the Territory of Columbia officially was renamed District of Columbia.

Supporters of the repeal believe that it will provide more flexibility for ISPS to innovate, and ISPs for their part have said that they will not block or throttle web traffic. Opponents of repealing net neutrality believe that the FCC will be powerless to enforce the rules that keep the internet at a level playing field.

The order also includes provisions pre-empting state and local governments from enacting net neutrality laws or regulations. Lawmakers in California and Washington have already stated they will try to enact their own legislation to replace the federal rules. In Congress, Senate Minority Leader Charles Schumer (D-N.Y.) has said that he intends to force a vote on a bill that would preserve the net neutrality rules.

NCSL Contact: Danielle Dean

Also of Note …

  • Doug Jones wins in major upset in the Alabama Senate special election. More from Fox News.
  • Rumors have emerged that House of Representatives Speaker, Paul Ryan (R-Wis.) plans to retire after the midterms. More from POLITICO
  • A credible news organization is preparing to unmask at least 20 lawmakers in both parties for sexual misconduct. More from POLITICO
  • The Thomas Fire in California is on track to become the largest wildfire in the state’s modern history. More from CNN

Happy Holidays from the NCSL Washington D.C. Office! Capitol-to-Capitol will return in January 2018.

Read the Dec. 11, 2017 Capitol-to-Capitol.

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NCSL's Advocacy in Washington

NCSL's Washington staff advocate Congress, the White House, and federal agencies on behalf of state legislatures in accord with the policy directives and resolutions that are recommended by the NCSL Standing Committees and adopted by the full conference at the annual NCSL Legislative Summit Business Meeting. As a result of the advocacy that is guided by these policies positions, NCSL is recognized as a formidable lobbying force in state-federal relations.

NCSL Staff in Washington, D.C.

  • Neal Osten | 202-624-8660 | Molly Ramsdell | 202-624-3584 | Directors
  • Max Behlke | 202-624-3586 | Budgets and Revenue
  • Danielle Dean | 202-624-8698 | Communications, Financial Services
  • Susan Frederick | 202-624-3566 | Law, Criminal Justice, and Public Safety
  • Ben Husch | 202-624-7779 | Natural Resources and Infrastructure 
  • Jon Jukuri  | 202-624-8663 | Labor, Economic Development and International Trade
  • Haley Nicholson | 202-624-8662 | Health
  • Ethan Wilson | 202-624-8686 | Commerce and Financial Services
  • Joan Wodiska | 202-624-3558 | Education