The federal tax overhaul plan released last week by the House Ways and Means Committee includes a number of measures to help working class families. It also features business and corporate tax changes that count on supply-side economics that haven’t worked, as Kansas proved in the five-year tax experiment the state abandoned earlier this year.
Most appealing is that the plan simplifies federal income taxes by reducing tax brackets, lowering tax rates, raising standard exemptions and limiting deductions.
Officially titled the Tax Cuts and Jobs Act, the plan would reduce the number of federal tax brackets from seven to four and lower taxes for most Americans. Tax tiers would drop from 15 percent to 12 percent at the lowest income tier and from 28 to 25 percent for middle-income earners (households earning $90,000 to $259,999). The top bracket would continue to pay 39.6 percent.
The plan doubles most standard exemptions, from $6,300 to $12,000 for individuals and from $12,700 to $24,000 for married couples filing jointly. It increases child care tax credits and expands the income limits for who’s eligible. It eliminates the alternative minimum tax. The plan also eliminates most itemized deductions except for charitable contributions, mortgage interest, property taxes and retirement savings such as 401(k)s.
Current mortgages would not be affected. But for new mortgages, deductions would only be allowed up to $500,000. Concerns have been raised that $500,000 is below the average home cost in several urban markets. That’s an issue that can be addressed.
Perhaps most concerning is that the plan would eliminate deductions for state and local taxes. That simply isn’t fair given the disparities in tax rates from city to city and state to state. Such taxes are beyond the taxpayer’s control and should be restored before reform is passed.
Also concerning is the lowering of the maximum tax rate for small businesses to 25 percent. That part of the plan includes sole proprietorships, partnerships and S corporations and sounds an awful lot like the LLC exemption that Kansas adopted in 2012 and abandoned last session. It’s important to understand that this tax cut benefits only the highest-earning small businesses. Most small businesses don’t earn enough income to be taxed more than 25 percent. The plan also lowers the maximum corporate tax rate from 35 percent to 20 percent.
It’s still early in the tax reform process. The Senate Finance Committee is expected to release its plan before Thanksgiving, and there are likely to be stark differences that must be ironed out. President Donald Trump is eager for tax reform to pass, but his ability to bring lawmakers together behind a plan is questionable at best.
Still, the House deserves credit for advancing tax reform ideas that would simplify the federal tax system and help many Americans. But the plan relies too heavily on the theory that tax breaks for businesses and corporations will trickle down throughout the economy. As Kansas knows all too well, it rarely works that way.