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November 6, 2017
2017-1842

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.

Implications

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

Amount

Tax reform for individuals

-$929.2

Revenue-raising provisions

$3,028.6

Repeal of deduction for personal exemptions

1,567.7

Changes to certain itemized deductions*

1,253.4

Repeal of other provisions relating to education

47.5

Alternative inflation measure

39.2

Refundable credit program integrity

23.1

Exclusion of gain from sale of a principal residence

22.4

American opportunity tax credit

17.3

Reduction in minimum age for allowable in-service distributions

13.1

Repeal of deduction for moving expenses

10.6

Other revenue-raising provisions

34.3

Revenue-reducing provisions

-$3,957.8

Reduction and simplification of individual income tax rates

-1,089.4

Enhancement of standard deduction

-913.4

Repeal of alternative minimum tax (Individual)

-695.5

Enhancement of child tax credit and new family tax credit

-639.9

Maximum rate on business income of individuals

-448.0

Increase in credit against estate, gift, and GST tax; repeal of estate and GST taxes

-171.5

Reforms to discharge of certain student loan indebtedness

-0.1

Tax reform for businesses

-$561.1

Revenue-raising provisions

$1,233.4

One-time transition tax on unrepatriated foreign earnings

223.1

Net interest expense limitation (30% of adjusted taxable income)

172.0

Modification of net operating loss deduction

156.0

Excise tax on certain payments from domestic corporations to related foreign corporations

154.5

Repeal of deduction for income attributable to domestic production activities

95.2

Current year inclusion by United States shareholders with foreign high returns

77.1

Repeal of credit for clinical testing expenses for certain drugs for rare diseases or conditions

54.0

Termination of private activity bonds

38.9

Interest expense limit on US corporation that is member of international financial reporting group

34.2

Entertainment, etc. expenses

33.8

Like-kind exchanges of real property

30.5

Repeal of advance refunding bonds

17.3

Nonqualified deferred compensation

16.2

Computation of life insurance tax reserves

14.9

Limitation on deduction for FDIC premiums

13.7

Modification of discounting rules for property and casualty insurance companies

13.2

Modifications to credit for electricity produced from certain renewable resources

12.3

Limitation on losses with respect to specified 10% owned foreign corporations

11.1

Other revenue-raising provisions

65.4

Revenue-reducing provisions

-$1,794.5

Reduction in corporate tax rate

-1,461.5

Deduction for foreign-source portion of dividends received by domestic corporations

-205.1

Repeal of alternative minimum tax (Corporate)

-40.3

Small business accounting method reform and simplification

-30.0

Increased expensing

-25.0

Look-thru rule for related controlled foreign corporations made permanent

-11.8

Expansion of section 179 expensing

-11.4

Other revenue-reducing provisions

-9.4

Tax reform for tax-exempts

$3.2

Revenue-raising tax-exempt provisions

$5.3

Revenue-reducing tax-exempt provisions

-$2.1

Net total

-$1,487.1

  

Gross tax increase

$4,267.3

Gross tax decrease

-$5,754.4

*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).

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Contact Information
For additional information concerning this Alert, please contact:
 
Quantitative Economics and Statistics Group
Bob Carroll(202) 327-6032;
Brandon Pizzola(202) 327-6864;
 

 


 

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