Tax Reform 2.0 Framework Released (article)
House Ways and Means Committee Chairman Kevin Brady (R-TX) announced a framework for a second phase of tax reform on July 24. The two-page framework outlines three priorities that include permanency for individual and small business tax cuts, new retirement savings incentives, and provisions to spur business innovation. As Chairman Brady advances the legislation in the House, its prospects to clear the Senate appear dim. Nevertheless, details of the framework remain an important factor in mid-term election year campaigns.
Headlining the Tax Reform 2.0 framework is a proposal to make permanent individual and small business tax cuts that were established under the tax reform law known as the Tax Cuts and Jobs Act (TCJA). Individual and small business tax cuts under the TCJA generally expire for tax years after Dec. 31, 2025. Although the framework does not specify which provisions would be made permanent, President Trump’s top economic advisor Larry Kudlow said earlier this year that full expensing for business investments would likely be included. A stated objective in the framework is to provide certainty for families, workers, and small businesses. Conceivably, other provisions to be made permanent include the individual tax rate reduction from 39.6 to 37 percent, the enhanced child tax credit, the doubled standard deduction, and the 20 percent deduction against qualified business income.
Retirement savings incentives are another key feature in the framework. The framework proposes to enhance Section 529 education savings accounts so that account balances can be used to pay for apprenticeship fees to learn a trade, the cost of home schooling, and certain repayments of student debt. The framework also proposes to allow families penalty-free access to retirement savings accounts to pay for expenses associated with a new child (whether by birth or adoption), where such withdrawals can be replenished in the future. Most significantly, the framework also proposes to create a new Universal Savings Account (USA) that will offer enhanced retirement savings flexibility for families.
Although the framework does not elaborate on the nature of a USA, the USA is a concept first introduced by Rep. Dave Brat (R-VA) in proposed legislation earlier this year. The USA would operate similarly to a Roth IRA, giving taxpayers the ability to accumulate retirement earnings with tax-free growth and tax-free distributions, but with no deduction for contributions. Unlike a Roth IRA, the USA would permit penalty-free withdrawals for any reason at any time, which can be later recontributed. This is one element of the flexibility touted in the framework.
Other retirement savings incentives endorsed recently by Chairman Brady for inclusion in a Tax Reform 2.0 initiative are not articulated in the published framework. These relate to proposed legislation called the Retirement Enhancement and Savings Act (RESA), which has some bipartisan support in the Senate. Highlights of the RESA include a new employer tax credit of up to $500 per employee for the establishment of a 401(k) or SIMPLE IRA plan that includes auto-enrollment, a repeal of the maximum age for contributions to traditional IRAs, and eased barriers on access to certain Multiple Employer Plans that allow businesses to share costs associated with retirement plan administration.
The last major feature of the framework pertains to incentives for business innovation. Although details on such proposals are light, the framework proposes to "remove barriers to growth," and specifically proposes to enhance a tax write-off for initial start-up costs of new businesses. Presently a deduction is available for up to $5,000 of start-up and organizational expenditures; amounts in excess of this level must be capitalized and amortized over 180 months. Further, the $5,000 write-off eligibility begins to phase out once total expenditures exceed $50,000, and is completely phased out when expenditures exceed $55,000.
The framework does not include reference to any technical corrections legislation related to the TCJA. Additionally, President Trump recently expressed his desire to see a further corporate tax rate cut from 21 to 20 percent included in the Tax Reform 2.0 initiative. This also does not appear in the framework.
Chairman Brady said previously that the cost of permanency for the individual and small business tax cuts would be "in the ballpark" of $600 billion. House Ways and Means Committee member Richard Neal (D-MA) criticized the framework as it does not offer proposals to offset this cost. Rep. Neal added, "This is never going to see the light of day beyond what the House might or might not do."
There is also broad sentiment that the framework will not garner enough votes to clear the Senate. The TCJA required only a majority of Senate votes under procedural rules for Budget Reconciliation. Budget Reconciliation rules can be used only once every fiscal year, so any tax law under the framework must obtain 60 votes to clear the Senate. Presently this means that at least nine Democratic votes are needed, which appears unlikely. The framework instead is seen widely as mid-term election year messaging. Rep. Tom Reed (R-NY) said recently, "You have to recognize the reality of the political timeline we’re under. We're going into mid-term elections." He then added, "We are being the rabble-rousers that we typically are in the House trying to lead on these issues and drag the Senate along."
Even though the framework faces an uphill battle to passage, it proposes many taxpayer friendly changes that can resurface after the mid-term election cycle. Furthermore, certain proposed changes to retirement savings incentives have some bipartisan support and may be separated into stand-alone legislation that stands a better chance at passage. For more information on the Tax Reform 2.0 framework, please contact your local CBIZ MHM tax professional.
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