In this New Year we’re told we have a “big, beautiful” new tax bill. It is big – over 500 pages. But is it beautiful?
Let’s place this bill in historical perspective, comparing it to what is recognized as the last “tax reform” legislation – the 1986 Tax Reform Act.
The 1986 legislation took 31 months from start (President Ronald Reagan’s call for a study) to finish (the president’s signature). It involved several Treasury Department studies, many hearings, and participation of both parties.
The Senate bill was passed 97-3. This included a 44-3 favorable vote from the 47 Democrats in the Senate. The House-Senate conference legislation, which was the final bill, was approved with a 33-12 favorable vote from Senate Democrats, with two not voting.
That’s called bipartisanship – for an OK-to-pretty-good bill. Tax experts admitted it had flaws. But it was developed in a lengthy process that had participation and buy-in from both political parties.
The 2017 tax bill started with an early October Republican-only budget resolution. This budget resolution, including a $1.5 trillion tax cut, was needed first so the tax bill could pass through “reconciliation,” requiring only 51 votes in the Senate.
The 2017 legislation took less than three months from start to finish, and it was developed and approved by one party. Beyond that, it was developed in secret by a handful of people in that party.
Republican members of the House and Senate not invited to these secret meetings admitted they did not know what was to be in the legislation until it was sprung on them shortly before a required vote.
So who did develop this legislation? We are told that 6,243 lobbyists self-identified, through required filings, as having worked on the 2017 tax legislation. Senate Democrats received their first markup from a lobbyist.
Tax policy experts have developed a list of features that should be part of a reform process. The 2017 legislation can be called many things, but it is most certainly not tax reform by conventional definition.
This is not surprising. Legislation developed in less than three months, with participation by a handful of people from one party, without Treasury tax-expert involvement but with the involvement of 6,243 lobbyists, is not likely to meet the standards of “reform.”
The legislation cuts the top corporate tax rate to 21 percent and also eliminates the corporate alternative minimum tax (a tax designed to ensure that corporations do not take excessive advantage of tax breaks).
In addition to the lower rate, it greatly expands the availability of tax deductions, allowing for complete write-off of business property acquisitions. So less corporate taxable income is taxed at a lower rate.
It also creates a new tax deduction for “business income” earned by non-corporate taxpayers. This new deduction takes up pages 23 through 46 of the new legislation, and includes over 5,000 words.
No one really knows how this 24 pages of new law works, but it takes just one tax expert to figure out how to game the new legislation. Then all of them will know how.
Tax legislation typically takes a long time to develop and involves Treasury tax experts to ensure abuse potential is minimized. Not so this time.
In 2017, a married couple with two children is entitled to a standard deduction of $12,700 and personal and dependency exemptions totaling $16,200. This is $28,900 of deductions. In 2018 that same couple gets a standard deduction of $24,000 and no personal and dependency deductions. A “doubled” standard deduction means less total deductions. Huh?
The 2017 legislation had to be passed with only one party – so we know that special deals were cut at the end to secure the votes of at least 50 Republican senators. They could only lose two, so each senator’s approval took on outsized importance and enabled special deals.
A politically savvy man criticized Obamacare, saying it created “predictable chaos” since it was passed with the votes of only one political party.
This man said, “When the Senate is allowed to work the way it was designed to – meaning a place where nothing is decided without a good dose of deliberation and debate, as well as input from both the majority and minority parties – it arrives at a result that is acceptable to people all along the political spectrum.”
This man no doubt hates the new tax bill, passed 51-0 by Republicans and opposed 48-0 by Democrats, and rushed through without any deliberation. This man is Mitch McConnell, and the words are from his 2016 memoirs.
You may like this bill, and that’s your choice. But it is not tax reform. Oh, and be careful the next time you drive over a bridge – it’s unlikely we’ll be able to pay to keep it in a state of repair.
Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at email@example.com.