House Slotted to Pass Tax Reform 2.0

September 25, 2018

The House is scheduled to vote this week on its trio of Tax Cut 2.0 bills that would that would permanently extend the temporary tax cuts for individuals, pass-through entities, and estates that were enacted in last year’s tax reform legislation, as well as provide new incentives to promote retirement and family savings and encourage the formation of start-up businesses.

Since the three bills passed the House Ways and Means Committee on Sept. 13, Speaker Paul Ryan (R-Wis.) and Committee Chairman Kevin Brady (R-Texas) have indicated that the plan was always for the House to vote on the second round of tax cuts this month. The House is scheduled to adjourn by Friday, Sept. 28 until after the midterm elections. The Senate, on the other hand, may stay in session for several more weeks. Senate Majority Leader Mitch McConnell (R-Ky.) intends to move through Brett Kavanaugh’s confirmation to the Supreme Court, as well other executive-branch picks sought by President Trump, before adjourning.

Under the 2017 tax law, nearly all of the provisions affecting individual taxpayers, as well as the new pass-through deduction under section 199A, were enacted on a temporary basis and are scheduled to expire after 2025. This was due to the Senate’s rules governing the budget reconciliation process–in particular, a rule stating that reconciliation legislation cannot increase the deficit in the years beyond the budget window.

Thus, the first of the three bills, the Protecting Family and Small Business Tax Cuts Act of 2018 (H.R. 6760) offers parity to taxpayers who pay on the individual side of the Internal Revenue Code. Of particular interest to small businesses, is the bill calls for a permanent extension of the 20 percent deduction on the qualified business income of certain pass-through entities under section 199A, as well as the new deduction limitation under section 461(l) for “excess business losses” received by pass-through owners.

H.R. 6760 is by far the most expensive of the three bills in the Tax Cuts 2.0 package. The Joint Committee on Taxation (JCT) estimates that the Ways and Means-approved bill would reduce federal receipts by nearly $631 billion from 2019-2028, with the bulk of these costs falling in the final three years of the budget window (that is, after 2025, when the current-law provisions are scheduled to expire).

The second bill in the Tax Cuts 2.0 package – the Family Savings Act of 2018 (H.R. 6757) includes a variety of provisions aimed at making it easier for smaller businesses to offer tax-qualified retirement savings plans to their employees, encouraging individuals to participate in retirement plans, and promoting savings for non-retirement expenses. The JCT estimates these provisions would reduce federal receipts by nearly $21 billion over 10 years.

The bill would ease administrative burdens for small employers participating in multiple employer pension plans (MEPs) by eliminating the so-called “one bad apple” rule under which a MEP defined contribution plan can become disqualified or lose other tax-favored status because one or more participating employers fails to take certain required administrative actions with respect to the plan.The measure also would encourage more businesses to participate in MEPs by making it easier for employers that are not in a common industry or do not share some other employment-based nexus to form “pooled” retirement plans that would be considered qualified MEPs under the Employee Retirement Income Security Act of 1974 (ERISA) rules. These provisions would be effective for plan years beginning after December 31, 2019, and would reduce federal receipts by a total of nearly $3.7 billion over 10 years.

The third and final bill in the package – the American Innovation Act of 2018 (H.R. 6756) includes two provisions intended to boost innovation by allowing new businesses to write off larger amounts of their costs up front as well as allowing a corporation that buys a start-up to retain some of the acquired entity’s net operating losses (NOLs) or other tax attributes, like research and development tax credits. According to JCT estimates, it would reduce federal revenues by just over $5.4 billion between 2019 and 2028.

Despite expected approval by the House, passage in the Senate this year would require 60 votes to overcome procedural hurdles – and thus some Democratic support. Neither Finance Committee Chairman Orrin Hatch (R-Utah) nor Senate Majority Leader Mitch McConnell (R-Ky.) has indicated an interest in bringing up an extension of the tax cuts this year, because it is likely to fall short of the 60 votes necessary for passage. However, one of the bills–H.R. 6757, addressing retirement savings, coulld attract bipartisan support and receive Senate attention before the end of this congressional session in October.