Trump Tax Reform Principles Signal Intent but Face Long Road to Reality
Treasury Secretary Steven Mnuchin and White House National Economic Council Director Gary Cohn today participated in a briefing that outlined the core principles the Trump administration proposes should guide the development of tax reform legislation.
Business Tax Reform
The Trump administration today called for a top tax rate of 15 percent for corporations and pass-through entities. If enacted, a top corporate tax rate of 15 percent would reduce the amount of equity available to build and preserve affordable rental housing by $2 billion or more. The proposal calls for establishing a territorial tax system and enabling a one-time repatriation of income abroad at lowered tax rate. The outline would generally “eliminate tax breaks for special interests,” but does not provide any examples. It is unclear what this could mean for community development tax credits, such as the low-income housing, new markets, historic and renewable energy tax credits.
Individual Tax Reform
The administration calls for reducing the seven existing individual tax brackets into three: 10 percent, 25 percent and 35 percent. The outline suggests doubling the standard deduction and providing tax relief for families with child and dependent care expenses. The framework would also restore the 20 percent rate for capital gains. At the same time, the proposed principles seek to “eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers.” In today’s briefing, Mnuchin specifically cited the state and local tax deduction as an example of a targeted tax break that should be terminated. In addition, the outline calls for repeal of the alternative minimum and estate taxes. However, the set of principles also explicitly proposes protecting homeownership and charitable tax incentives.
Mnuchin and Cohn pledged that throughout the month of May the administration will hold “listening sessions with stakeholders” on the guideposts described today. They said there will be extensive consultation with Congress to turn the concepts into legislation.
The tax reform goals outlined by the Trump administration are largely similar to tax reform ideas floated by the Trump campaign. As such, today’s announcement doesn’t represent a significant change in policy. However, today’s announcement does signal that the administration is giving tax reform greater attention and policy urgency. It also signals a desire to play a more active role in shaping tax reform. Now that both the House blueprint and Trump core principles are available, attention will shift to the Senate, which to date has largely adopted a wait-and-see approach to tax reform.
While there are similarities between the Trump tax reform footprint sketched out today and the House tax reform blueprint, it is noteworthy that nothing released today explicitly endorses many of the high-profile components of the House blueprint, such as the border adjustment tax, expensing of depreciable assets, or limiting interest deductibility, although Cohn and Mnuchin did not rule them out.
Significantly more details would be required to convert these ideas into legislation. There are also three main political decisions on such legislation that Congressional leadership must decide:
- Will it be revenue neutral?
- Will Congress pursue comprehensive tax reform, as opposed to just addressing business taxation, international taxation, or reducing tax rates?
- Will the legislation be partisan or bipartisan?
So, while the greater visibility that today’s announcement engendered will increase urgency, the release will also likely delay when the House Ways & Means Committee will consider tax reform legislation. At this point it’s expected that would happen in the late spring/early summer at the earliest, and possibly as late as the fall.