ATR 2018 Tax Reform Priorities

7/23/2018

The tax reform bill passed by the Republican House and Senate and signed by President Trump reduced taxes on businesses and individuals, repealed distortionary credits and deductions, and modernized the international system of taxation.

This legislation, known as H.R. 1 or the Tax Cuts and Jobs Act (TCJA), has grown the economy, increased take-home pay for Americans at every income level, and made America a more competitive place to do business.

Despite passage of this landmark piece of legislation, there is still work to be done. For instance, there are numerous provisions in the tax code that are temporary. In other cases, there are areas that can be further improved or simplified.

The Tax Cuts and Jobs Act implemented dramatic tax reduction for individuals and families.

Because of tax reform, a family of four earning the median income of $73,000 will receive a tax cut of more than $2,000 this year. Similarly, a single parent with one child earning $41,000 per year will see tax reduction of 73 percent, resulting in a $1,304 tax cut.

However, many important provisions in this bill could not be made permanent because of Democrat obstructionism and arcane senate rules. Due to these constraints, Republican lawmakers were forced to sunset the individual tax provisions starting 2026.

Tax reform should make all of these provisions permanent:

Doubled Standard Deduction

• The TCJA doubled the standard deduction from $6,000 to $12,000 ($12,000 to $24,000 for a family) until 2026.
• 105,055,150 families and individuals took the standard deduction in 2015.​
• Between 2018 and 2025 this is a $690 billion tax cut.

Lower tax brackets

• The TCJA reduced taxes at every income level. If lawmakers fail to act, Americans at every income level will see higher taxes.
  • Current law effective 1/1/2018: 10%, 12%, 22%, 24%, 32%, 35%, 37%
  • Starting 1/1/2026: 10%, 15%, 25%, 28%, 33%, 35%, 39.6%
     

Base broadeners (SALT, personal exemptions)

• The TCJA repealed numerous distortion credits and deductions as a tradeoff for lower tax rates as part of a net tax cut. These base broadeners should be made permanent together with other tax cuts in the TCJA. Provisions include:
  • Repeal of personal exemptions of $4,050 per filer and dependent.
  • Limitation of the home mortgage deduction to mortgages of $750,000 or less.
  • Limitation of the deductibility of state and local taxes to $10,000 or less.
     

Increase in AMT exemption

• The TCJA increased the threshold at which the Alternative Minimum Tax hits taxpayers to $1 million for a family and $500,000 for an individual.
• As a result, the number of people paying the AMT has decreased from 4.5 million to 200,000.
• This is a tax cut of $572 billion between 2018 and 2025.
   

Increase the death tax exemption (and fully repeal the death tax)

• The TCJA increased the threshold at which the death tax impacts a taxpayer from $5 million to $11 million (double for a couple).
• This is a $69 billion tax cut between 2018 and 2025.
• If this sunsets, the return to pre-TCJA levels would mean that more families and small businesses would be hit by the death tax. Ideally, the death tax should be fully repealed.
   

Child Tax Credit

• The Child tax credit was doubled to $2,000 per child from between 2018 and 2026.
• This is a $533 billion tax cut between 2018 and 2025. In 2015, 22 million families took the CTC.
   

20 percent deduction for pass-through businesses (LLCs, S-corporations, sole properties, partnerships)

• This deduction phases out starting at $157,500 ($315,000 for a joint return) over the next $50,000/$100,000 of income. Past this threshold, a limitation for certain service businesses and a capital limitation apply.
• This is an $88 billion tax cut between 2018 and 2025.

 

No carried interest capital gains tax increase

• Carried interest capital gains income is indistinguishable from other types of capital gains income. It is simply the investor’s share of an investment partnership. All taxpayers involved in the partnership – those providing expertise and those providing capital – are taxed the same.
• The tax code rightly treats any income earned in this case as partnership income, meaning taxation flows through to individual taxpayers. The tax code also rightly treats this income as capital gains income as it is earned through long-term investment, not as ordinary income.
• The TCJA rightly chose to maintain the existing treatment of carried interest as partnership income and capital gains income.
• Some proposals have called for taxing carried interest as ordinary income. This tax increase would negatively impact pension funds, charities, and colleges that depend on investment partnership structures in order to meet savings goals. Small businesses would also be badly affected, as investment money available from these partnerships dries up.
   

Tax treatment of art and other collectibles

• While every other asset has a top capital gains tax rate of 23.8 percent, art and other collectibles are currently taxed at a discriminatory rate of 28 percent.
• Art has become a significant asset class and should be treated the same as other investment property.
   

Expand Tax-advantaged Health Savings Accounts

• HSAs are used in conjunction with low premium, high deductible health insurance plans and provide a vehicle for individuals to spend and control their own money on their own health needs.

• HSAs offer triple tax benefits to users – contributions made are tax free, interest and investment is earned tax free, and payments made to qualifying health expenses are tax free. 
• HSAs should be expanded so that the contribution limit is increased, so that more Americans have access to the accounts, and so that they can be used on more healthcare services and products.
   

Simplify & Expand Savings Accounts

• Currently, there are about 15 tax-advantaged savings accounts that taxpayers can use to save for things like retirement, healthcare, and education. Unfortunately, this system can be so confusing and complex that it is difficult for most Americans to take advantage of and it causes households to under-save.
• When used correctly these saving accounts drastically reduce the tax burden on families. Tax reform should build on this success by promoting and simplifying the use of savings accounts. There are several options:
   
  • Roll these fifteen choices into a streamlined system with a few flexible, but defined savings accounts. For instance, back in the mid-2000s, the Treasury Department came up with a proposed three-account program to replace the existing system.
     
  • Create an additional account (not displacing what’s already there), but which allows saving in the most simple way possible. A universal savings account would allow a taxpayer to contribute a certain amount of after-tax earnings each year which would they could invest and grow as they see fit. They would then be free to withdraw these funds at any time, for any reason. These types of accounts already exist in Canada and the United Kingdom, and they are doing very well.
     
  • Expand 529 savings account so they can be used for apprenticeships and other education programs. While 529s are currently used to help pay for a traditional college education, it cannot be used for apprenticeships even though there are many ancillary expenses associated with these programs. 
     

Keep the corporate rate competitive

• The TCJA reduced to federal corporate rate from 35 percent to 21 percent, taking the U.S. rate from the highest in the developed world to a globally competitive rate.

• However, after state taxation, the average corporate rate is almost 26 percent, while the average rate in the developed world is 24 percent.
• Any efforts to raise the corporate rate would make the U.S. a more uncompetitive place to do business. It would also reduce economic productivity and raise the cost of capital, resulting in lower long-term wages, and the creation of fewer jobs.
   

Make Full Business Expensing Permanent

• Immediate, full business expensing encourages investment and increases productivity, leading to stronger economic growth and the creation of new jobs.
• According to the Tax Foundation, full expensing increases GDP by 5%, increases wages by 4%, and creates over 1 million jobs over a ten year period.
• The TCJA enacted 100 percent, full business expensing for certain investments until 12/31/2022 under Section 168(k) of the tax code.
• Starting 1/1/2023, the provision begins phasing down at 20 percent per year, fully phasing out by 2027 (i.e. 100 percent in 2022, 80 percent in 2023, 60 percent in 2024, 40 percent in 2025, 20 percent in 2026, eliminated 2027).
• This provision should be made permanent.
   

No carbon tax

• A carbon tax – regardless of how it is structured, or whether it is offset – would increase the tax burden on families and businesses:
  • It would increase the costs of energy, resulting in higher production costs, and higher energy costs for consumers.
  • It would also lower economic productivity leading to lower wages and fewer jobs for American families and individuals.
  • For instance, a study prepared for the Hillary Clinton presidential campaign found that a carbon tax of $42 per greenhouse gas ton would have a disproportionate impact on low income households, would cause gas prices to increase 40 cents a gallon, would cause electricity prices to increase 12%-21%, and would cause household energy bills to go up $480 a year.
     

Maintain existing EBITDA calculation for limitation of interest deductibility

• The TCJA included a reasonable limitation on the ability of businesses to deduct net interest expenses under Section 163(J) of the tax code.
• Under the law, companies can deduct interest to the extent it is below 30 percent of EBITDA (earnings before interest, tax, depreciation and amortization.) Starting 1/1/2022, the deduction for net interest expense is narrowed so that it is based on a corporation’s earnings before interest and tax (EBIT).
• The existing EBITDA interest limitation is consistent with the limitations imposed by foreign competitors and should be made permanent.
   

Maintain current research and experimentation tax deduction

• Businesses are currently permitted to deduct research and experimentation expenses under section 174 of the tax code.

• Starting 1/1/2022, businesses are required to amortize research & experimentation expenditures over five years if that research is conducted in the U.S. or 15 years if conducted outside of the U.S.
• Lawmakers should ensure that research and experimentation expenses remain fully deductible.
   

Maintain tax deductibility of advertising

• The current tax treatment of advertising is the right one. Advertising expenses are one of the many costs of doing business that firms are properly allowed to deduct, and has been treated as such in the tax code for more than 100 years.
• Advertising directly or indirectly supports almost 22 million jobs and $5.8 trillion in total economic output. Every dollar of advertising spending generates $22 of economic activity.
• Past tax reform proposals have called for limiting or eliminating the advertising deduction as a “pay-for” in tax reform. However, any revenue raised in this way would be dwarfed by the negative impacts to the economy. 
   

Extend & Make Permanent the Craft Beverage Modernization Act

• The TCJA reduced the excise tax on wine, beer & spirits for tax years 2018 and 2019:
  • Excise taxes on beer: Taxes for the first 60,000 barrels produced by small brewers are reduced from $7 to $3.50. Past this, taxes on the first six million barrels is reduced from $18 to $16.
  • Excise taxes on wine: Implements a $1 per wine gallon credit on the first 30,000 gallons, 90 cents per gallon on the next 100,000 gallons, and 53.5 cents per gallon on the next 620,000 gallons. After 1/1/2020, the credit reverts to current law (90 cents on the first 100,000, phased out until 150,000 gallons, available only to domestic manufacturers).
  • Excise taxes on distilled spirits: Implements a $2.70 tax on the first 100,000 gallons, $13.34 tax up to 22.1 million gallons, and $13.50 tax above 22.2 million gallons. After 1/1/2020, the tax reverts back to $13.50 per proof gallon.

• These tax cuts should be extended, or ideally made permanent.
   

Maintain Current Law Tax Treatment of Sec. 1031 Like Kind Exchanges for Real Property Assets

• 1031s allow deferral of taxation when purchasing an asset if the taxpayer uses the equity and profits accrued from the sale of that asset to invest in another, similar assets.

• Like-kind exchanges of real property are allowed under Section 1031 of the tax code.
• Because investors don’t have to pay tax until they cash out, Section 1031 eliminates a barrier to investment, which in turn incentivizes capital formation and business investment.
• The TCJA repealed 1031s for personal property assets as part of a tradeoff that involved moving to full expensing for qualified property. If full expensing is allowed to expire, lawmakers should restore 1031 for personal property to promote pro-growth cost recovery.
   

Restore Sec. 1031 Like-Kind Exchange Treatment for Spectrum Swaps

• The TCJA limited the use of 1031s to non-real property assets as part of a tradeoff that involved moving to full business expensing. However, this tradeoff negatively impacted spectrum swaps which do not benefit from expensing, and now do not benefit from 1031s.
• Spectrum is a core asset for wireless carriers and spectrum swaps help maximize capacity and efficiency, promote investment, and ultimately benefit consumers. They provide business certainty while the alternative – leasing spectrum – promotes uncertainty and creates burdensome compliance requirements.
• 1031s should be restored for spectrum swaps.
   

Preserve credit union tax exempt status

• Credit unions are currently treated under the tax code as non-profits. Under this system, taxes are paid at the entity level, or by customers.
• Any tax savings are passed along to the credit union’s members in the form of higher interest paid to savings deposits or lower interest rates.
• Increasing taxes on credit unions would negatively impact millions of consumers.
   

Reform Sec. 280E to protect businesses operating legally under state law

• Section 280E of the tax code was created in 1982 to prevent criminals that sold illegal drugs from avoiding a heavy tax liability by claiming expenses as if they were running legitimate businesses.

• While it was created to stop a clear loophole in the tax code, today it has resulted in unintended tax penalties that are hurting legal businesses across the country.
• Today, 29 states plus the District of Columbia have legalized medical or recreational use of cannabis. Sec. 280E prevents businesses operating in these states from deducting ordinary business expenses including wages and salaries, health insurance expenses, equipment, advertising costs, pensions, and other expenses.
   

Modernize the Section 48(c) investment credit

• The section 48(c) investment tax credit currently exists in law for established energy technologies such as solar, fuel cells, and microturbines.
• As long as Section 48(c) exists in law, it should be modernized and reformed so that it applies to the new technologies that it was originally intended to promote, such as linear generators.
   

Make the CFC look-through rule permanent

• The CFC-look through rule was enacted in 2006 as an exception to Subpart F as a way to protect certain foreign earnings from taxation if they were deployed from one CFC (or subsidiary) to another CFC. This provision moved closer toward a system of territoriality.
• The TCJA retained and expanded subpart F income even as it eliminated deferral and moved to a territorial system of taxation. However, the bill did not change current law treatment of the CFC look through rule, and this provision is set to expire 12/31/2019.

• Failing to make the CFC look-through rule permanent (or at the very least extend it) would create a barrier to investment and constrain the free flow of capital.
   

Extend Current Deduction for FDII and GILTI

• The TCJA implemented two new, complementary international provisions that act as a carrot and stick toward the tax treatment of highly mobile IP income – the GILTI (Global Intangible Low Tax Income) and deduction for FDII (Foreign Derived Intangible Income):
  • FDII allows a deduction for income connected with IP housed in the U.S. This deduction equals 37.5 percent of the 21 percent corporate rate, resulting in an effective rate of 13.125 percent. Starting 1/1/2026, the deduction is set to decrease to 21.875 percent, resulting in an effective rate of 16.406 percent.
  • GILTI imposes taxation on IP-derived income of foreign subsidiaries. This provision imposes taxation with a 50 percent deduction, resulting in an effective rate of 10.5 percent. This deduction is set to scale down to 37.5 starting 1/1/ 2026, resulting in an effective GILTI rate of 13.125 percent.
• The current tax rates for both provisions should be maintained.
• Separately, the structure of FDII and GILTI should be examined so that the provisions do not unduly burden legitimate business activity.
   

Extend Current Law BEAT rate

• The Base Erosion Anti-Abuse Tax (BEAT) applies a 10 percent excise tax on certain outbound “base erosion payments” from a US entity to a foreign entity.
• Starting 1/1/2026, the BEAT is set to increase to 12.5 percent.
• This provision should be maintained at 10 percent.
• Separately, the structure of the BEAT should be examined so that the provision does not unduly burden legitimate business activity.
   

Ensure Expatriates are Protected from the GILTI and deemed repatriation

• The TCJA erroneously subjected Americans living overseas to the GILTI and one-time tax on deemed repatriation. Under current law, Americans overseas are treated as U.S. headquartered entities while their businesses are treated as foreign entities.
• The GILTI and repatriation provisions should be amended so that American business owners residing overseas are not targeted by them.
   

Repeal the Foreign Account Tax Compliance Act (FATCA)

• Under FATCA, any overseas bank account held by U.S. citizens must be reported to the IRS. 
• This means that millions of Americans must report personal information and comply with burdensome IRS regulations and reporting requirements. If they fail to do so, the IRS can impose a 30 percent withholding penalty on their financial institution’s U.S. holdings.
• FATCA also requires American citizens to comply with tax filing forms if they have assets overseas that meet or exceed $50,000. For overseas Americans, this means they must comply with the tax compliance laws in their country of residence in addition to IRS laws.
   

Territoriality for individuals

• Today, the U.S. is one of the few countries in the world with a system of citizenship-based taxation. This system affects an estimated eight million Americans that live abroad.
• Under this system, American citizens residing abroad must comply with complex IRS rules and are double taxed on income – once when they earn it overseas and again by the U.S. government solely because they are citizens.
• Moving to territoriality for individuals will end this needless double taxation. This reform will also increase job opportunities for Americans overseas and reduce the power of the IRS.
   

Obamacare imposed nearly $1 trillion ($1,000,000,000) in higher taxes over the next decade. These taxes raised the cost of healthcare and increased the tax burden on middle class families.

Delaying or permanently repealing these taxes will reduce costs and increase take-home pay for middle class families:

Tax on innovative medicines

• Obamacare imposed a tax on the producers of prescription medicine based on relative share of sales. In 2018, the tax is $4.1 billion.
• This tax contributes to higher costs of medicines and should be repealed or delayed.

Health insurance tax

• The health insurance tax is imposed on health insurance premiums and impacts 11 million households that purchase through the individual insurance market, 23 million households covered through their employer, and 1.7 million small businesses.
• This tax is economically destructive:
  • It is estimated to increase premiums by as much as 3 percent. Over the next decade the tax could increase premiums by an average of $5,000, according to the American Action Forum.
  • The National Federation of Independent Business estimates the tax could cost up to 286,000 in new jobs and cost small businesses $33 billion in lost sales by 2023.
• This tax totals almost $150 billion tax over the next ten years.
• The health insurance tax is currently in effect in 2018, but is currently paused for 2019. Ideally, the tax should be fully repealed.
   

Chronic Care tax on Americans with high medical bills

• Prior to Obamacare, American families and individuals were permitted to deduct medical expenses to the extent they exceeded 7.5 percent of adjusted gross income (AGI). Obamacare increased this threshold to 10 percent of AGI.
• The TCJA reduced the threshold to qualify for the medical expense deduction to 7.5 percent of AGI for two years (2017 and 2018). Starting 1/1/2019, the threshold for this deduction reverts back to 10 percent of AGI.
• This 7.5 percent threshold to deduct medical bills should be made permanent.
   

Medical device tax

• The medical device tax is a 2.3 percent excise tax imposed on the industry, totaling $20 billion over the next decade.
• Medical device makers contribute roughly $150 billion to the U.S. economy. Nationwide, there are over 6,500 medical device companies in America. 80 percent of these have fewer than 50 employees, so the medical device tax disproportionately falls on small businesses.
• First imposed in 2013, the tax is paused for 2018 and 2019 and will go into effect in 2020.
   

Employer mandate tax penalty

• The employer mandate forces employers to pay a $2,000 tax per full time employee (30 hours per week) if they do not offer “qualifying” – as defined by the government — health coverage, and at least one employee qualifies for a health tax credit. This tax penalty has resulted in employers offering workers fewer hours.
• Over a decade, this tax will total $171 billion.
   

Tanning tax

• This discriminatory Obamacare tax is imposed directly on tanning businesses in the form of a 10 percent excise tax.
• It has wiped out an estimated 10,000 tanning salons, many owned by women.
• This is a $600 million tax over ten years.
   

3.8 percent net investment income tax

• The 3.8 percent capital gains tax created a new top capital gains tax rate of 23.8 percent, and is also imposed on investment income for small businesses filing through the individual income tax system.
• While this tax is imposed on income above $200,000 per year ($250,000 for married filers), the tax is not adjusted for inflation, so it will continue to grow over time to hit more and more middle-income taxpayers.
   

0.9 percent Medicare payroll tax

• Obamacare imposed an additional 0.9 Medicare surtax on wages and self-employment income.
• While this tax is imposed on income above $200,000 per year ($250,000 for married filers), the tax is not adjusted for inflation, so it will continue to grow over time and hit more and more middle-income taxpayers.