Comprehensive tax reform is high on the agenda for the new Trump Administration. It is listed on President-elect Trump’s 100-day plan, and House Speaker Paul Ryan (R-Wisc.) promised just weeks ago that he would force major tax cuts through Congress quickly if the Republicans gained both Houses of Congress and the Presidency. Both Trump and Ryan also have pledged to repeal the Affordable Care Act, which contains many tax-related provisions.
The broad outlines of the different Republican tax plans represent major reform—a reduction in rates for both individuals and corporations, elimination of many deductions and credits in return for those lower rates, and perhaps even a move from the U.S.’s current worldwide system of international taxation to a territorial system—that used by our major trading partners. Both Trump and the House GOP already have comprehensive plans for overhauling the tax code, and some blend of these plans is likely to form the blueprint for any tax reform bill. At first, these plans had major differences, but when Trump’s first tax plan was estimated to lose too much revenue, Trump revised his tax platform to include many of the House GOP provisions (“A Better Way”), including collapsing the seven tax rates into 3 rates, 12%, 25%, and 33%, doubling the standard deduction, and repealing the estate and gift taxes.
We can expect a major reduction in the corporate tax rate, from 35% to 15% or 20%, which would reduce the motivation for U.S. corporations to move their headquarters overseas, termed “inversions.” Any new tax reform bill also is likely to provide a greatly reduced tax rate for repatriation of corporate profits now held overseas. Trump has mentioned a 10% rate on offshore holdings while the Ryan-House GOP plan has an 8.75% rate. Trump also has indicated that passthrough businesses, such as partnerships and S Corporations, will get the reduced corporate rate. Currently, passthrough income is taxed to the owners at individual tax rates up to 39.6%. Also, both the Trump and Ryan plan would allow full immediate expensing of all business investments in both tangible and intangible property.
Repeal of the Afforable Care Act
Repeal of the Affordable Care Act also is part of Trump’s first 100-day plan and is included in the House GOP “A Better Way” initiative. The Act is largely administered through the tax code, and Trump’s replacement plan would include many tax and non-tax changes, including expansion of tax-favored health savings accounts and allowing insurance purchases across state lines. Assuming Speaker Ryan is still controlling the House, the House GOP health care plan is likely to be the starting point the Republicans work from in repealing and replacing Obamacare. That plan has its own surprises, which include many ideas that have been floating around conservative circles for years, including a cap on medical liability damage awards and the partial privatization of Medicare.
Whether tax reform and Obamacare repeal and replacement will get done early in the Trump Administration could depend on what happens with the relationship between Speaker Ryan and the new President. If Ryan stays on as Speaker, the legislation may move through more quickly and may look more like the House GOP Plan. If the Speaker is not reelected or is rebuffed by Trump, it may take longer to move the plans forward. In any event, it will not be an easy process. Even with a united Republican front, tax bills have many winners and losers, and the negotiations are always complex.
An important incentive to move on these plans is that the Republicans know they have to get major legislation through before the mid-term elections in 2018, which could flip the House or Senate to the Democrats. When the new Congress begins in 2017, the Republicans will be in a position to use budget reconciliation to pass these bills— a procedural tool that allows them to bypass Democratic opposition. Not all provisions of Obamacare can be changed in reconciliation, only the ones considered to be tax and spending provisions, including the employer and employee mandate, the 3.8% net investment income tax, and the medical device tax. This is same technique the Democrats used in 2010 to pass the Affordable Care Act.
In short, major tax reform and repeal of Obamacare may not get done in the first hundred days, but there is a high probability we will see far-reaching changes in tax and health care policy within the first two years of the new Trump Administration.
About the blogger
Lucia Nasuti Smeal is a guest blogger on tax topics for Frazier & Deeter. Smeal is an attorney, a tax professor with Georgia State University’s J. Mack Robinson College of Business, and former editor of Tax Notes Today, published by Tax Analysts. Smeal also worked as a legislative analyst for the Congressional Research Service and is a former memeber of the U.S. House Periodical Press Corps. She is a frequent speaker on current tax developments.