December 1, 2016
By GEORGE G. JONES AND MARK A. LUSCOMBE
While taxes did not seem to be one of the top issues in the November elections, both presidential candidates included a variety of tax proposals in their platforms. Also, there were a few tax-related initiatives on state ballots.
With Republicans in control of both the White House and Congress, there may be some greater success in getting tax legislation enacted. Still, Republicans do not have a filibuster-proof majority in the Senate, and Republican congressional leaders and the new president do not appear to be united on all aspects of President-elect Trump’s tax proposals.
INDIVIDUAL TAX CUTS
President-elect Trump has focused his tax proposals on lowering both individual and business tax rates in order to try to stimulate economic growth. His proposals include reducing the individual marginal rate tax brackets to three rates: 12, 25 and 33 percent. This is an increase from the current bottom rate of 10 percent, but a decrease from the current top rate of 39.6 percent. These rates are in line with Republican congressional proposals and therefore are likely to survive as part of any tax reform effort in Congress.
Trump has also proposed to more than double the standard deduction to $15,000 for single individuals and $30,000 for joint filers. This would be tied to an elimination of the deduction for personal exemptions and the head of household filing status. For some taxpayers, such as single parents, the elimination of the personal exemptions and the head of household filing status could cost more than the increase of the standard deduction would offset. Congressional Republicans may be inclined to rework this formula somewhat.
BUSINESS TAX CUTS
On the business side, President-elect Trump has proposed a reduction in the top corporate tax rate to 15 percent and to also extend this 15 percent top rate to all business income, such as that from pass-through entities and sole proprietorships. This would therefore reduce the top rate for corporations from the current 35 percent to 15 percent and reduce the top rate applied to business income from pass-through entities and sole proprietorships from a top ordinary income tax rate of 39.6 percent to 15 percent. Trump has suggested that, in exchange for the lower tax rate on non-corporate business income, some sort of tax, like the tax on dividends, would be applied to distributions of business income.
While Congressional Republicans have supported a reduction in the corporate tax rate, their proposals have tended to be more in the 22 to 25 percent range to try to maintain revenue neutrality. Trump’s proposals are projected to add significantly to the deficit, although his advisors counter that economic growth resulting from the tax cuts would offset additions to the deficit. There will probably be some compromises in the final corporate rate proposed.
The concept of extending the 15 percent rate to other business income has not been included in Congressional Republican proposals. It could create incentives to try to convert ordinary income to business income, such as by reclassifying employees as independent contractors. The Trump campaign has stated that they would hope to include provisions to prevent this but have not provided any specifics. It is not clear that Congressional Republicans are ready to endorse this proposal, with concerns about the deficit also being a factor here.
President-elect Trump has stated that one of his first priorities would be to repeal and replace the Affordable Care Act. This would apparently mean the repeal of all of the taxes associated with the act. These would include the 3.8 percent tax on net investment income, the additional 0.9 percent Medicare tax on wages and self-employment income, the penalties on individuals for failure to obtain health insurance and on employers for failure to offer affordable health insurance, the “Cadillac” tax on overly generous health plans, and the medical device excise tax. It would also, however, eliminate the premium assistance credit and the small business health insurance credit.
Congressional Republicans have long advocated repeal of the ACA, but have not been very specific about what would replace it. President-elect Trump has outlined some basic elements of a replacement plan, but it probably needs to be fleshed out much more before enactment. It is possible, however, that the Congress might try again to repeal the act without a detailed replacement in place, and Trump might support that effort.
THE ESTATE AND GIFT TAX
President-elect Trump has also proposed the repeal of the federal estate and gift tax. This is also a position long advocated by Congressional Republicans and could be enacted in the new Congress. Trump proposed that, as part of repeal, stepped-up-basis on death would be disallowed for taxable gains in excess of $10 million.
PROPOSALS ON CHILD CARE
President-elect Trump has outlined a set of proposals to provide tax assistance for child care. He would create a new above-the-line deduction for child and dependent care expenses. He also proposes to increase the Earned Income Tax Credit for working parents through a spending rebate. He has proposed the creation of Dependent CARE Savings Accounts with individual contributions matched 50 percent by government contributions.
On the business side, he has also proposed to increase the annual cap for the business tax credit for on-site childcare, with a reduced recapture period. While in many ways these look more like Democratic than Republican proposals, these tax breaks are likely to garner bipartisan support in Congress.
OTHER INDIVIDUAL PROPOSALS
In order to somewhat offset the cost of his proposed tax reductions, Trump has proposed to impose a cap on the amount of itemized deductions that could be claimed on a tax return at $100,000 for single filers and $200,000 for joint filers. The idea of limiting itemized deductions has been an element of tax reform proposals, although fundamental tax reform proposals have suggested completely eliminating or at least limiting a number of the individual itemized deductions.
Trump has also proposed eliminating the Alternative Minimum Tax. This idea has generally had congressional support, with the main issue here usually being what to come up with to offset the lost revenue.
OTHER BUSINESS PROPOSALS
Trump has proposed taxing carried interests of private equity fund managers at capital gain rates, rather than ordinary income rates. This was also one of Hillary Clinton’s proposals. This Trump proposal appears to be somewhat in conflict with his proposal to tax business income at a 15 percent tax rate, which would be even lower than the top capital gains tax rate. The Trump campaign has said that they would expect to address this issue as well, but have not provided any specific details.
President-elect Trump has proposed to eliminate certain unspecified “corporate tax expenditures,” although indicating that the Research & Development Credit would be spared. Congressional tax reform proposals have generally included the elimination of many corporate tax breaks as part of the cost of lowering corporate tax rates. However, corporate lobbyists continue to pressure for preservation of their favorite tax breaks.
He has proposed a doubling of the Code Sec. 179 small-business expensing election to $1 million. Trump has also proposed the immediate deduction of all new investments in a business, which has also been endorsed by congressional tax reform/simplification advocates. This proposal would, however, seem to eliminate the need for the Code Sec. 179 proposal. President-elect Trump has proposed to eliminate the deduction of interest. This idea has not been part of most tax reform proposals, but it could be considered as the Congress and the Internal Revenue Service try to deal with the reclassification of debt as equity in abusive situations.
On the international front, Trump has proposed a “one-time” deemed repatriation tax of 10 percent on corporate profits of U.S. multinational corporations being held offshore. Various versions of a repatriation tax have been proposed by both Congressional Republicans and Democrats, sometimes as part of international tax reform, other times to pay for infrastructure improvements. Some version of a repatriation tax is likely to be included in any tax legislation in the new Congress.
STATE TAX INITIATIVES
A few states had tax-related ballot initiatives. California had propositions on the ballot to impose fees for plastic bags. Oregon had a proposal to increase the tax on corporate sales by out-of-state businesses. Many states this year have proposals related to marijuana. California, Massachusetts and Nevada had approved proposals to legalize marijuana for recreational use. While not directly a tax issue, these proposals have tended to be a revenue source for the states that enact them. With the federal government continuing to view marijuana as a controlled substance, these state approvals also raise federal tax issues for marijuana businesses operating in these states.
Congress has a number of tax legislative proposals already before it. These include a package of tax breaks that expire at the end of 2016. Also included is a package of retirement savings enhancements, a bill to prevent stock options from being taxed until the stock is sold, a limit on IRS asset seizure authority, an exclusion from tax for qualified student loan discharges for students who have died or suffered a permanent disability, and tax breaks for 2016 flooding and hurricane victims. It is not clear if any of these will be taken up in the lame duck session or left until early 2017.
A bill permitting employers to continue to offer health reimbursement arrangements to their employees without penalties imposed by the Affordable Care Act may not be needed if that act is repealed.
Although the Republican position in both houses of Congress will be somewhat weaker in the new Congress than the current Congress, they retain the majority in both houses and are therefore likely to wait until the new Republican administration is inaugurated in January 2017 to push for tax legislation, rather than make any significant effort in the lame duck session.
It would be expected, however, that a Republican Congress and Republican administration will make a significant effort at tax reform in 2017 that is likely to include many of President-elect Trump’s proposals, even if in somewhat modified form to try to come closer to a revenue-neutral bill.
The Democrats in the Senate continue to have sufficient numbers to threaten a filibuster; however, revenue items can often be put on a track that requires only a simple majority for approval.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at Wolters Kluwer Tax & Accounting.