Republicans Introduce Tax Reform 2.0 Bills Aimed at Locking in 2017 Tax Cuts

On September 13, the House Ways and Means Committee advanced several bills under the heading "Tax Reform 2.0." The legislative package makes permanent many of the individual and small business tax changes in the Tax Cuts and Jobs Act of 2017 (TCJA), and includes measures designed to make it easier for families and businesses to save for retirement and to boost innovation by supporting start-up businesses.

First unveiled on September 10, the Tax Reform 2.0 legislative package consists of three separate bills: the American Innovation Bill of 2018 (HR 6756), the Family Savings Bill of 2018 (HR 6757), and the Protecting Family and Small Business Tax Cuts Bill of 2018 (HR 6760). While the primary aim of the package is to make permanent the individual and small business tax cuts enacted through 2025 under the TCJA, it also includes new incentives for retirement savings and business innovation.

Many of the key provisions of the TCJA—which include lower individual tax rates, an expanded standard deduction, a 20% deduction for income from pass-through businesses, and a $10,000 cap on the state and local tax (SALT) deduction—are currently scheduled to expire after 2025. These tax changes were made temporary to enable Republican members of Congress to pass the TCJA with a simple majority using a reconciliation process in the Senate.

HR 6760, which passed the committee on a party-line vote, permanently lowers the tax rates for individuals, preserves the expanded child tax credit and the new paid family leave tax credit, and locks in the estate tax exemption of $11.2 million per individual. It also extends the lower medical expense deduction threshold through 2020, and makes permanent the Section 199A deduction for pass-through businesses. Democrats offered a series of amendments during the markup, including provisions that would restore the full SALT deduction, increase family-related tax credits, and make permanent the lower medical expense deduction threshold for eligibility; but none were agreed to.

HR 6757, which was also approved by the committee along party lines, focuses on retirement savings. The proposed legislation exempts small retirement accounts from mandatory payouts, eliminates the age limit on individual retirement account contributions, and helps military reservists by allowing them to maximize their retirement contributions. The measure also permits small businesses to join together to create a 401(k) plan, and simplifies the rules for participation in employer plans. In addition, the bill creates a new fully flexible savings account known as the Universal Savings Account, and allows families to withdraw up to $7,500 from their retirement accounts on a penalty-free basis when they have a new child. The bill also permits families to use 529 accounts to cover the cost of apprenticeship fees, home schooling, and student loans. One amendment was offered by a Democratic member, but was not agreed to.

The third bill, HR 6756, which was approved by the committee by voice vote, allows businesses to deduct up to $20,000 in start-up expenses in the year they are incurred, and to expand by bringing in new investors without triggering limits on their access to tax benefits like the research and development credit.

The bills are expected to reach the House floor for a full chamber vote by late September, but are unlikely to be taken up by the Senate prior to the midterm elections, where they would need 60 votes for approval under regular order. Republicans may, however, try to attach all or parts of the package to a year-end tax extender bill that has a better chance of passing with bipartisan support. It appears, for example, that Senate Finance Committee Ranking Member Ron Wyden (D-OR) may be willing to work with Republican colleagues in crafting bipartisan retirement savings legislation. The Joint Committee on Taxation has estimated that the passage of the Tax Reform 2.0 measures would lower Federal revenue by around $657 billion from 2019 to 2028.

"We must keep building off the momentum from last year's tax reform to ensure our economy keeps booming," House Ways and Means Committee Chairman Kevin Brady (R-TX) said in announcing Tax Reform 2.0. "That's why we're here today to change the culture of Washington — from one that waits an entire generation to fix a broken tax code to one that keeps our code ahead of the pack and the best in the world. So, while Tax Reform 1.0 was about changing the trajectory of the economy, Tax Reform 2.0 is about changing the culture in Washington. That starts with today's important update to our code."

By contrast, Democratic lawmakers have been highly critical of the Tax Reform 2.0 framework. "With this second attempt at major tax legislation, congressional Republicans have doubled down on their initial tax scam and are yet again putting the wealthiest, most privileged Americans ahead of average, hardworking families," Ways and Means Ranking Member Richard Neal (D-MA) said in response to the release of the legislative package.