House Republicans successfully passed their version of a bill to reform the tax code Thursday in a major step towards reaching one of their top policy goals.
The Tax Cut and Jobs Act is intended to simplify the tax code and reduce rates for taxpayers across the country. Republicans promise the bill will alleviate the burden taxpayers face while spurring economic growth – though critics contest it will mostly just benefit the wealthy and large corporations. The Senate will still need to pass its version of the legislation, and the two bills will need to be amended to resolve the difference between them before they can be passed onto President Donald Trump for his signature.
The House passed the bill 227 to 205. There were 13 Republicans who voted against the legislation, with no Democrats supporting it.
Republicans have focused on what the bill would do for middle-class taxpayers since first releasing details of their plan last year. While the plan has gone through some notable changes as party members debate it, the overarching goals of lowering rates and making it easier to pay taxes have remained a main focus.
Trump met with Republican members just prior to the vote for a closed-door meeting. The House Republican Conference, the organizational body for party members, hosted the meeting to discuss details and rally support. Trump has been supportive of the effort to reform the tax code, with the promise of job growth aligning with his core campaign promises.
“Today, this House, the people’s House, will pass historic legislation to improve the lives of Americans nationwide,” Kevin Brady, chairman of the House Ways and Means Committee, said before the vote. “For too long this broken tax code has put the needs of the people second, propping up Washington special interests at the expense of hard-working Americans. For too long, this broken tax code has rewarded companies for outsourcing American jobs, instead of encouraging them to create jobs here at home. For too long, this broken tax code has eroded America’s economic leadership around the globe.”
Republicans also promise to improve economic growth by lowering rates on corporations and some smaller businesses. The bill reduces the top rate for corporations down to 20 percent. It is currently at 35 percent. It also limits the rate paid by pass-through entities, a type of businesses that is often small and family-owned, down to 25 percent. These taxes are paid by the individuals who own the company.
“This vote today is a defining moment for our country,” House Minority Leader Nancy Pelosi said prior to the vote. “Today, Republicans have brought fourth a bill that pillages the middle-class to pad the pockets of the wealthiest, and adds tax breaks for corporations shipping jobs out of America, while drastically increasing the national debt. My colleagues, the bill Republicans have brought to the floor today is not tax reform, it’s not even a tax cut, it is a tax scam.”
A key component of the bill is how it changes tax brackets–a graduated scale of the rate people will be taxed based on their income level. It reduces the current seven brackets down to four while lowering rates for everyone except the highest income earners. The highest income bracket under the bill taxes married couples making over $1 million dollars and individuals making half that at the current top rate 39.6 percent. Earlier summaries of the plan promised to lower the top rate, but the income threshold was increased so fewer people would be subjected to it.
The tax bill sets the next bracket at 35 percent for individuals making over $200,000 and married couples making over $260,000. The third bracket will tax married couples making $90,000 and individuals making above $67,500 at 25 percent. The last income bracket imposes a tax of 12 percent. An unofficial fifth bracket sets a zero percent rate for the lowest income earners.
Republicans are hoping to simplify the tax code by eliminating or reducing certain tax deductions. The National Taxpayers Union Foundation found in a 2015 study that the current tax code causes the economy to lose $233.8 billion and 6.1 billion hours of productivity annually just from how complicated it is.
Businesses that are considered pass-through entities include sole proprietorships, partnerships, and S corporations. But critics warn pass-through businesses aren’t always small and family-owned, opening up the possibility of abuse by higher income taxpayers looking for a lower rate. The owners and investors of these businesses are directly taxed on their income instead of having a corporate rate applied.
The tax reform bill has faced plenty of criticism, particularly when it comes to how it might impact middle-class taxpayers. Democratic lawmakers and other critics on the left warn many middle-class families could actually see an increased rate. The Tax Policy Center, a progressive think tank, found in a report Nov. 13 at least seven percent of taxpayers would pay higher taxes in 2018, with that number increasing to at least 24 percent in 2027.
State and local (SALT) tax deductions became a main point of concern when it comes to middle-class tax rates. SALT deductions allow taxpayers who itemize to deduct some of their local taxes on their federal taxes. The bill repeals most of those deductions, leaving taxpayers in high tax states the inability to offset some of that burden. CNBC reported that it still allows taxpayers to deduct up to $10,000 on their property taxes.
House Republicans hope to create a zero percent tax rate for the lowest income earners by roughly doubling standard deductions. The changes would essentially eliminate taxes on the first $24,000 of income earned by a married couple, and $12,000 earned by individuals. The change is intended to ensure even lower income earners benefit from the plan.
The bill makes several other key changes to the tax code, as well. It enhances the child tax credit while including a new family tax credit. It also allows for full expensing for at least five years. The bill also repeals the alternative minimum tax and phases out the death tax, officially known as the estate tax.
The plan also streamlines higher education benefits with the intent of helping families save for education expenses like college tuition. But some have expressed concern, reports NPR, that the plan could hurt graduate students by taxing tuition waivers provided to graduate students in exchange for teaching and research. Those waivers are currently not taxed.
The Senate will first have to pass its version of the bill before lawmakers can enter what is known as a conference committee. The process allows both chambers to meet to resolve differences between their bills. Both bills will have to be identical before they can be passed onto the president to be signed. Some key differences include the number of income brackets and what to do with some deductions.