November 6, 2017
Key revenue changes under the House Ways and Means Committee tax reform bill, "Tax Cuts and Jobs Act"
House Ways and Means Committee Chairman Kevin Brady (R-TX) released a comprehensive tax reform bill, the "Tax Cuts and Jobs Act," on November 2, 2017, along with revenue estimates from the Joint Committee on Taxation (JCT), a description of the provisions and statutory language. The bill proposes changes that would, according to JCT estimates, result in a gross tax increase of $4.3 trillion and gross tax cut of $5.8 trillion. The resulting $1.5 trillion increase in the deficit is consistent with the budget resolution recently approved by Congress. The $1.5 trillion deficit increase is based on the conventional approach for estimating the revenue impact of tax legislation, which accounts for many of the ways households and businesses might respond to the changes, but holds the overall size of the economy constant.
Table 1 lists the major provisions included in the bill ranked by size of the JCT's estimate of their revenue change. The provisions affecting individuals are estimated to reduce taxes by $929 billion over 10 years, while the provisions affecting businesses are estimated to reduce taxes by $561 billion over 10 years. The individual provisions include the benefits of the plan's lower individual income tax rate on pass-through business income.
To put the breadth of these changes into perspective, the Congressional Budget Office projects the US income tax system (individual and corporate income taxes) to raise, under current law, $25.9 trillion over 10 years — $22.0 trillion through the individual income tax and $3.9 trillion through the corporate income tax. Over the 10-year budget window, the JCT estimates the bill to reduce individual income taxes (including the lower tax rate on certain pass-through income) by 4% and corporate income taxes by 14%.
Individual tax changes
— The changes in individual tax rates (four tax brackets of 12%, 25%, 35%, and 39.6%), repeal of the individual alternative minimum tax, increase in the standard deduction, enhancement of the child tax credit and new family tax credit are estimated to lose $3.3 trillion over 10 years.
— Individual base-broadening provisions are estimated to raise $3.0 trillion over 10 years. The repeal of personal exemptions accounts for 52% of individual base broadening.
Business tax changes
— The reduction in the corporate income tax rate and other revenue-losing business provisions are estimated to cost $1.8 trillion, with the lower corporate income tax rate comprising 81% of the revenue cost over 10 years.
— Business base-broadening provisions would raise $1.2 trillion over 10 years, with four of the business base-broadening provisions — the one-time transition tax on deferred foreign earnings, the general net interest expense limitation (30% of adjusted taxable income), the modification of the net operating loss deduction and the excise tax on certain payments from domestic corporations to related foreign corporations — accounting for 57% of the business base broadening.
— The plan would move the US to a territorial system with a 100% dividend exemption, but tighter Subpart F rules, plus a one-time transition tax on previously deferred foreign earnings. The JCT estimates that the international tax provisions would raise $285 billion over 10 years, including the one-time transition tax of $223 billion.
The release of the bill represents a significant development in the tax reform debate. While there are likely to be changes to this legislation as the tax reform debate evolves, the release of a fully specified and scored tax plan reflects the many choices that Congress and the Administration will need to consider in a manner consistent with the $1.5 trillion revenue loss allowed by the budget resolution recently approved by Congress. Companies will need to understand the specific provisions, as well as carefully assess the potential impacts of the bill on their company, industry and markets.
Table 1. Major tax provisions ranked by revenue change in the "Tax Cuts and Jobs Act" (2018-27, $billions)
*Provision includes repeal of itemized deductions except mortgage interest, investment interest, charitable contributions, up to $10,000 in real property taxes, and certain miscellaneous expenses.
Note: Due to rounding in the JCT provision-by-provision revenue estimates, tax reform for businesses was $0.1 billion too high over 10 years. Half of this rounding was allocated to "Other revenue-raising provisions" and half to "Other revenue-reducing provisions."
Source: Joint Committee on Taxation, Estimated Revenue Effects of H.R. 1, the "Tax Cuts and Jobs Act," November 2, 2017 (JCX-46-17).