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Congress works best when there is a deadline. And there is an important deadline coming up. Many of the federal tax provisions in the 2017 Tax Cuts and Jobs Act that affect individuals expire at the end of this year. They include lower income tax rates, higher standard deductions and child credit, larger estate and gift tax exemption, alternative minimum tax easings, the 20% deduction for qualified business income of pass-throughs, the $10,000 cap on deducting state and local taxes on Schedule A of the Form 1040, and much more.
The odds for a tax bill this year are quite good. In addition to the expiring tax provisions, Donald Trump has made tax changes a priority on his legislative agenda. If lawmakers act as expected, we could see legislation sometime this year. But the process won't be all smooth sailing. There are some key sticking points that Republican lawmakers will have to work through. Here are six of those hurdles.
1. The Timing of a Tax Bill
Trump and some Republicans, including House Speaker Mike Johnson (R-LA), want taxes passed quickly. They want tax changes inserted into one early big bill that would also include border security and energy reform. Other Republicans, such as Senate majority leader John Thune (R-SD), desire a two-pronged plan. They would like to address border and energy first, thinking that would be easier procedurally, and then turn to federal tax changes.
On top of all this, lawmakers have to tackle government funding and the debt ceiling. Current government funding ends on March 14. If no agreement is reached before then to extend funding, many departments and agencies, including the IRS, will shut down on March 15.
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2. A Narrow Republican Edge in Congress
Republicans have a very slim majority in the House and a less-than-60-member majority in the Senate. With a one- or two-person House majority, House Republicans cannot afford to lose votes. A group of one or more naysayers can wield lots of power and affect what goes in or stays out of any tax bill. That means the House will have to pass something that pretty much every Republican in the lower chamber will agree with. It won't be easy for House Speaker Johnson to keep his unwieldy members in line and to present a united front.
On the Senate side, Republicans will have to use budget reconciliation to override the need for 60 votes in the Senate to defeat a filibuster. Budget reconciliation requires only a simple majority vote. But this procedure has lots of technical rules. For example, lawmakers can't use it on anything directly affecting Social Security. The Senate parliamentarian will be a key figure to watch during congressional negotiations on the tax bill.
3. The Cost of a Tax Bill
There is also the massive federal debt to consider. Decades of deficit spending have added up to a $36 trillion national debt. A 10-year extension of all the expiring provisions in the Tax Cuts and Jobs Act would add nearly $5 trillion to the debt, and that’s not counting the other tax breaks that Trump promised to corporations and various groups on the campaign trail.
Believe it or not, there are still some deficit hawks in Congress, and they will closely watch the cost of any tax bill. They will also want to see a number of pay-fors included in any tax package to help offset the cost.
4. Tariffs
Trump backs blanket tariffs on imported foreign goods coming into the U.S. For example, he vowed right after his inauguration that his administration would impose a 25% tariff on goods coming from Mexico and Canada, effective Feb. 1. He has even pitched creating a new federal agency, the "External Revenue Service," to collect these tariffs.
The tariffs would raise revenue that could potentially be used to help offset the cost of tax cuts, but they would also cause the prices of many everyday items to go up for consumers.
5. Other Tax Cuts Promised on the Campaign Trail
While on the campaign trail, Trump promised even more tax cuts to specific groups of individuals and corporations, above and beyond what is expiring in the Tax Cuts and Jobs Act. They include making tips, overtime pay and Social Security benefits tax-free; letting individuals deduct interest that they pay on loans to buy a car; increasing the child tax credit amount; lowering the corporate tax rate; and more.
These extra tax easings would increase the cost of any tax bill, and there might not be enough Republican support in Congress for all of them.
6. State and Local Tax Deduction
The sixth hurdle might be one of the thorniest of all the sticking points. It is how to fix the state and local tax (SALT) deduction taken by taxpayers who itemize on Schedule A of Form 1040. Currently, there is a $10,000 cap on this tax write-off.
Some House Republicans from high-tax states, such as New York, New Jersey, and Pennsylvania, want to increase the SALT limit or repeal it. If lawmakers do nothing, the $10,000 cap disappears, and taxpayers would be able to deduct state and local taxes on Schedule A as they had prior to 2018.
Trump supported lifting the SALT deduction cap on the campaign trail, and he needs the votes of these House Republicans from high-tax states to pass a tax bill. But increasing the cap or getting rid of it altogether would cost the government a lot of revenue that Trump and congressional Republicans would want to use for other tax cuts.
The SALT deduction is a very important topic in the tax bill negotiations, and the options discussed by lawmakers are all over the board. They include full repeal of the SALT deduction, doubling the $10,000 cap to $20,000 for taxpayers filing a joint return, increasing the cap to $15,000 for single filers and $30,000 for joint filers, only allowing property taxes to be deducted, and more.
This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.
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