A PEAK AT THE TRUMP BLUEPRINT FOR TAX REFORM

President Trump and Republican lawmakers recently unveiled a blueprint for tax reform which calls for many things, including a reduction in and compression of income tax rates, a doubling of the standard deduction for income taxes, an elimination of most tax deductions other than the mortgage interest and charitable deductions. The blueprint also calls for the elimination of the alternative minimum tax (AMT), the estate tax, and the generation-skipping tax (GST). The blueprint calls for a dramatic reduction in the top corporate tax rates and a large reduction in the tax rate for pass-through entities (such as partnerships). There are many things which remain unclear, including the prospects of it becoming law in its present form.  While Republicans hold majorities in both the House and the Senate, the blueprint is not being universally accepted by the so-called “fiscal hawks” of the Republican wing who are philosophically opposed to increasing deficits in the federal budget. By most estimates, this blueprint, if passed, is projected to adding many billions to the deficit due to the reduction in tax revenues. Other uncertainties include:

• If the estate tax and GST tax are repealed, will the gift tax remain? The gift tax is commonly viewed as a backstop to the income tax and is a disincentive preventing people from dodging the income tax by gifting property to others in a different income tax situation.
• If the estate tax and GST tax are repealed, would the “step-up” in basis of Section 1014 of the Internal Revenue Code remain? The provision sets the income tax basis of property at the value determined for estate tax purposes. If there is no estate tax, it’s unclear what would happen with the step-up in basis. Other countries don’t have such a step-up in basis. Note: The step-up is a very significant tax break for the middle class as it often results in the savings of many thousands of dollars in taxes following a death on the sale of a typical family’s most valuable asset, the family home. While a repeal of the estate and GST taxes may benefit the so-called “1%”, elimination of the step up in basis will likely increase taxes for the many of the other “99%” who are homeowners.
• Would the legislation have a sunset provision, like the Bush-era tax cuts? Due to a Senate rule, legislation can be blocked if it will increase the deficit beyond a 10-year time horizon. Essentially, this means that 60 votes are required in the Senate to pass permanent legislation which would increase the deficit, even if using the reconciliation process.
• Another hurdle for passage is on the income tax side. The proposal would eliminate the deduction for state and local income taxes. This would be extremely unpopular in many Congressional districts, especially in California. Nearly half of the districts which reported the highest percentage of returns with deductions for state and local income taxes have Republican representatives.

Tax reform is very difficult. The last time this sort of comprehensive tax reform succeeded was in 1986, when Republican President Ronald Reagan worked with Democrats, including Speaker “Tip” O’Neill, to arrive at a deal. Such bipartisan collaborations are very rare in recent times. There are many unanswered questions created by the blueprint.  In the coming weeks, Congress will have to put some flesh on these bones and do so in a way that can satisfy at least the diverse concerns of the Republicans in Congress if it is to have any chance of passing.  As the Obamacare repeal effort has already shown, that task may not be an easy one.