While I was off this past week, the Tax Reform Panel came out with two proposals that are similar. The two proposals would:
1. Eliminate state and local tax deductions for individuals. Given that a large percentage of the US population lives in high-tax states (such as California), this isn’t going to pass.
2. Limitation on deducting health insurance. This is another non-starter given the high cost of health insurance. I do understand the panel’s reasoning (if taxpayers feel more pain, they will do more to lower health insurance costs) but I find a hard time seeing this passing.
3. Elimination of the Alternative Minimum Tax (AMT). This will be applauded by all.
4. Increasing charitable deductions; changing charitable deductions to excess of 1% of AGI. This makes both economic and political sense.
5. Changes to deductibility of mortgage interest; credit instead of deduction; limitation on amount. This is a political non-starter (see item #1 above). The proposed rules are complex, and will change the cap from $1 million of purchase-based interest (as a Schedule A deduction) to the maximum amount of FHA interest (will vary depending on location), to be taken as a credit. This will strike at higher-income taxpayers, and will, thus, be politically unpopular.
6. Change many deductions to credits. As best as I can tell, this will not change many taxpayers’ taxes, but could have a small positive impact to low-income taxpayers.
7. Lower the number of brackets from six to four; lowest individual bracket at 15%; highest at 32%. I believe that Democrats will not like the idea of lowering the top tax bracket. This proposal does not have a huge impact. Remember, the panel had to make these reforms “revenue neutral.” The big cut is the elimination of the AMT. This item is window dressing.
8. Changes to retirement plans, savings plans, etc. The changes, which will be difficult to pass, would change popular plans (such as IRAs) into refundable credits. This will aid low-impact taxpayers, but would disrupt an entire industry that has been built up around IRAs and similar programs. I doubt this will be implemented.
9. Two alternative individual plans: Either 8.25% on capital gains and interest taxed at regular tax rates or 15% on capital gains, interest, and divdends. The first plan exempts dividends (if I read it correctly) for individuals, ending double-taxation on dividends. The second plan continues the double-taxation on corporate investments but corporations can expense their investments. I need to read more about these plans to determine both their feasiblity and the chance of passage.
Overall, I think these plans will be buried in the political wastebasket. Perhaps the panel had good intent, but there’s too much in these plans that is political suicide for too many members of Congress.
There have been many comments about these plans. Roth Tax Updates posts about the first alternative individual plan here. Tax Professor Daniel Shivaro comments here. The New York Times comments here. Professor Maule has his comments, and they’re not positive.