The Republican Study Committee (RSC) released its Fiscal Year 2020 Budget this week, and it includes a number of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy changes. Among the most important are proposals to make the Tax Cuts and Jobs Act’s (TCJA) individual and expensing provisions permanent, shorten depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. schedules, create universal savings accounts (USAs), and eliminate tax extenders.
Make the TCJA’s Individual Tax Rates and Deductions Permanent
The TCJA significantly lowered individual income tax rates, but the provisions behind these reduced rates are scheduled to expire at the end of 2025. According to the Tax Foundation Taxes and Growth model, making the TCJA’s individual provisions permanent would boost long-run GDP by 2.2 percent, long-run wages by 0.9 percent, and add 1.5 million full-time equivalent jobs. But that growth comes at a cost. It would reduce federal revenue by $165 billion annually on a conventional basis and by $112 billion annually on a dynamic basis.
Read more about making the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. cuts permanent here.
Permanence for Full and Immediate Expensing of Investments
Expensing—the immediate deduction of the full cost of a company’s investments—was one of the TCJA’s most pro-growth provisions, removing the previous tax treatment’s disincentive to invest. These provisions are scheduled to be phased out, beginning in 2023. At the same time, the TCJA limited the ability of firms to immediately deduct their research and development costs. Starting in 2022, companies will have to amortize these costs over five years. The RSC budget would make the TCJA’s expensing provisions permanent and cancel the switch to amortization, allowing firms to properly write off business expenses in the future.
Read more about full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. here, and about R&D amortization here.
Shorten Depreciation Schedule for Structures
While the TCJA enacted 100 percent bonus depreciation for certain short-lived business investments it did not grant the same treatment to private structures, which comprise 70 percent of all private sector capital stock. Businesses must depreciate their investments in residential structures over a 27.5-year schedule and in nonresidential structures over a 39.5-year schedule. Since capital outlays must be deducted over a long period, businesses may decide not to make an investment.
Shortening these schedules would allow businesses to deduct more of their investment costs from their taxable income in present value terms, which would reduce their tax liability and encourage new investment.
Read more about the expensing of structures here.
Create Universal Savings Accounts
USAs are simple, all-purpose accounts available to anyone, with no restrictions on either the timing or purpose of withdrawals. Unlike many savings accounts, savings are taxed only once and are not full of complicated restrictions, making them a valuable savings option, especially for low-income individuals. The RSC would create USAs with an annual contribution cap of $10,000. USAs were also included in the House Ways and Means Committee’s Tax Reform 2.0 package last year.
Read more about Universal Savings Accounts here.
Eliminate Extenders
The “tax extenders” are a set of tax provisions that have been temporarily continued for more than a decade. Most of the extenders were made redundant by the TCJA or are narrow provisions favoring specific industries. Furthermore, because they are often authorized retroactively, they do little to encourage economic growth. The RSC budget would eliminate the extenders, ending Congress’ ritual of prolonging these temporary provisions.
Read more about extenders here.
Stay informed on the tax policies impacting you.
Subscribe to get insights from our trusted experts delivered straight to your inbox.
Subscribe