Tax Reform 2.0 Takes Shape

This evening, Chairman Kevin Brady (R-TX) released a series of bills which have been dubbed “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. Reform 2.0.” These bills modify and build upon the Tax Cuts and Jobs Act passed in December, whose individual provisions are currently set to expire at the end of 2025.

The first bill, the Protecting Family and Small Business Tax Cuts Act of 2018 (H.R. 6760), includes several key changes to 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. :

• Tax Rates: The bill would make the tax rate changes from the Tax Cuts and Jobs Act permanent.
• Key Deductions: The bill would make the $10,000 cap to the state and local taxes paid deduction and the lower mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. permanent. It would also make permanent changes to miscellaneous individual income tax deductions.
• Standard DeductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. and Child Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. : The expanded standard deduction and child tax credit would become permanent, as would eliminating the personal exemption.
• Medical Expense Deduction: Additionally, it would extend the newly-expanded medical expense deduction. The Tax Cuts and Jobs Act expanded the medical expense deduction eligibility limit from 10 percent of adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” to 7.5 percent for tax years 2017 and 2018. This bill would extend that through the 2020 tax year, allowing more individuals to deduct their medical expenses.
• Pass-Through Businesses: The Section 199A deduction would be made permanent.

We previously scored making the individual income tax changes from the Tax Cuts and Jobs Act permanent. The change would increase long-run GDP by 2.2 percent and create 1.5 million new full-time equivalent jobs. These changes are estimated to cost $166 billion a year on a static basis and $113 billion on a dynamic basis.

The second bill is the Family Savings Act of 2018 (H.R. 6757). This bill would make two large changes. First, it includes a number of reforms to retirement accounts, similar to those from the Retirement Enhancement and Savings Act of 2018. Second, it would create small universal savings accounts. Individuals would be able to contribute up to $2,500 into the accounts on an annual basis, with any withdrawals being tax free.

The third bill, the American Innovation Act of 2018 (H.R. 6756), would allow businesses to deduct their start-up costs. Firms could deduct the lesser of their start-up expenses or $20,000. The $20,000 amount would be reduced for firms with more than $120,000 in expenses. Expenses that could not be deducted immediately would be amortized over 180 months.

We will continue to update our analysis of Tax Reform 2.0 over the coming days.

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