H.R. 1, Tax Cuts and Jobs Act

Floor Situation

On Wednesday, November 15, 2017, the House will begin consideration of H.R. 1, the Tax Cuts and Jobs Act, under a closed rule. The bill was introduced on November 2, 2017, by Rep. Kevin Brady (R-TX) and was referred to the Committee on Ways and Means, which ordered the reported on November 9, 2017 by a vote of 24-16.

Summary

H.R. 1 reforms the nation’s tax code for the first time in 31 years, providing tax relief to all Americans and lowering taxes on businesses. 

The bill lowers individual tax rates for Americans and reduces the number of brackets from seven under the current code to four. Under the Rules Committee Print, individuals will pay the following rates:

• 12% up to $45,000
• 25% up to $200,000
• 35% up to $500,000
• 39.6% over $500,000

For married couples filing jointly, the following rates apply:

• 12% up to $90,000
• 25% up to $260,000
• 35% up to $1 million
• 39.6% over $1 million

The Rules Committee Print also doubles the standard deduction – from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples. It preserves the current rate of 23.8% for capital gains and dividends.

The legislation establishes a new Family Tax Credit, which expands the Child Tax Credit from $1000 to $1600 and provides a $300 credit for each parent and each non-child dependent. Phase-out thresholds are raised to $115,000 for individuals and $230,000 for married couples. In addition, it builds in additional integrity of the tax credits by requiring individuals to have a Social Security number valid for work in order to claim the credit and by requiring a Social Security number for each child for whom the credit is claimed.

Additional simplification is provided by making the following amendments to the tax code:

• Eliminates Coverdell plans and expands 529 Savings Plans by allowing some funds to be used for K-12 purposes
• Preserves the mortgage interest deduction with new levels, including interest on up to $500,000 in mortgage principal on new homes, and grandfathers existing mortgages
• Preserves deductions for charitable contributions
• Repeals deductions for tax preparation expenses, medical expenses, alimony payments, student loan interest, and moving expenses (but preserves the exclusion for moving expense reimbursement for a member of the Armed Forces).

The estate tax exemption amount is doubled immediately to completely exclude up to $11.2 million in assets, and the estate tax is completely repealed in 2025 and beyond.

The alternative minimum tax is repealed. The individual alternative minimum tax (AMT) operates alongside the regular income tax. It requires many taxpayers to calculate their liability twice—once under the rules for the regular income tax and once under the AMT rules—and then pay the higher amount. Originally intended to prevent perceived abuses by a handful of the very rich, it now affects roughly 5 million filers.

The bill reduces the corporate tax rate from 35% to 20% and reduces the tax rate on pass through business entities to a maximum of 25%. In addition, the bill provides a 9% tax rate, in lieu of the ordinary 12% tax rate, for the first $75,000 in pass-through business income of an active owner or shareholder earning less than $150,000. Businesses of all types are eligible for the preferential 9% rate, and such rate applies to all business income up to the $75,000 level. This lower small pass-through business rate phases in, at 11% for 2018 and 2019, 10% for 2020 and 2021 and 9% for 2022 and thereafter. For unmarried individuals, the $75,000 and $150,000 amounts are $37,500 and $75,000, and for heads of household, those amounts are $56,250 and $112,500.

The corporate tax would shift to a modern, competitive territorial tax system. To avoid creating tax incentives for companies to shift profits or jobs abroad, the bill includes anti base erosion measures that impose tax on certain income of foreign affiliates. As a transition into the territorial tax system, the bill provides for deemed repatriation of earnings trapped offshore at effective tax rates of 7% for earnings held in illiquid assets and 14% for earnings held in liquid assets.

Businesses would be allowed to immediately write off the full cost of new equipment and the bill protects the ability of small businesses to write off interest on loans. The legislation retains the low-income housing tax credit and preserves the research and development tax credit. Additional modifications include:

• Terminating private activity bonds
• Eliminating tax exempt bonds for stadium construction
• Ending the $7,500 tax credit for the purchase of electric vehicles
• Repealing an inflation increase for renewable energy production tax credits
• Limiting the ability of businesses and tax-exempt entities to deduct executive compensation above $1 million
• Eliminating the ability of a large banks to deduct  their FDIC premium payments
• Eliminating the business deduction for entertainment expenses

The bill imposes an excise tax of 1.4% on net investment income of private colleges and universities if their endowment assets exceed $250,000 per student. The Johnson Amendment will be repealed, allowing churches and other charities to make statements relating to political campaigns in the ordinary course of their activities.

Background

On October 26, 2017, the House agreed to the Senate Amendment to H.Con.Res. 71, establishing a budget for fiscal year 2018 and budget levels for fiscal years 2019-2027. In addition, the resolution included reconciliation instructions on tax reform for the Senate Finance Committee and the House Committee on Ways and Means.

Under the current tax code, the individual tax rates are as follows:

• 10% up to $9,325 for an individual and up to $18,650 for joint filers
• 15% up to $37,950 for an individual and up to $75,900 for joint filers
• 25% up to $91,900 for an individual and up to $153,100 for joint filers
• 28% up to $191,650 for an individual and up to $233,350 for joint filers
• 33% up to $416,700 for an individual and up to $416,700 for joint filers
• 35% up to $418,400 for an individual and up to $470,700 for joint filers
• 39.6% over $418,400 for an individual and over $470,700 for joint filers

The current corporate rate is 35% and the top rate on pass-through income is the maximum individual rate of 39.6%.

Cost

The Joint Committee on Taxation estimates that this legislation will reduce revenues by $1.437 trillion.

Staff Contact

For questions or further information please contact Jake Vreeburg with the House Republican Policy Committee by email or at 2-1374.