US House tax plan still fatally flawed

The tax plan released in the U.S. House yesterday retains the same basic architecture as the unified tax framework previously released, and as a result, continues to have the same fatal flaws. It provides large tax cuts for the highest-income Americans and profitable businesses, while everyday folks get a smaller portion of the bill’s tax benefits – and some may face tax increases.

This tax plan irresponsibly adds at least $1.5 trillion to the deficit over 10 years, and it is lower- and middle-income Americans who will most feel the brunt of the impact when the bills come due to pay for these tax cuts. Importantly, we don’t have to guess where the cuts to essential services would come from. The menu of cuts is laid out in the budget plans passed by Congress and put forward by President Donald Trump this year; affordable health care through Medicaid and Medicare, basic food assistance through SNAP, and a range of other services that invest in our communities have all been targeted for deep cuts.

Of course, the details are important and we’ll be taking a deeper dive in the coming days. But at first look, we see that the centerpieces of the House plan are provisions that provide large tax cuts to corporations and those with the highest incomes:

  • Cutting the top corporate tax rate from 35 percent to 20 percent.
  • Tax cuts for “pass-through income.” The plan cuts taxes on some Americans who pay income taxes on pass-through income (from businesses such as partnerships, S corporations, and sole proprietorships). While touted as a benefit for small businesses, in fact the majority of this kind of income goes to high-income households.
  • Doubling the exemption then repealing the estate tax. Compared to the tax framework, the House bill delays the repeal of the estate tax to occur in 2024; this maneuver only hides the true cost of this provision, which only benefits the 0.2 percent largest estates nationally.
  • Repealing the Alternative Minimum Tax, which was created to ensure that higher-income people with a large number of deductions and other tax preferences still pay a minimum level of tax.

Retaining the current top income tax rate of 39.6 percent, rather than dropping it to 35 percent as proposed in the earlier tax framework, won’t significantly change the fact that this bill includes large tax cuts to the highest-income households.

Low- and middle-income households face a complex array of income tax changes in the House tax plan. More detailed analysis will be needed to understand the overall impact of the plan and how it differs from the unified framework (under which the 40 percent of American households with the lowest incomes were estimated to receive only about 5 percent of the tax cuts.)

But it’s already clear there are several ways this bill leaves behind families struggling to get by and get ahead. For example:

  • The proposed expansion of the Child Tax Credit leaves out more than 10 million children in low-income working families.
  • About 3 million children in working families would lose eligibility for the Child Tax Credit; about 80 percent of these are children born in this country and the remainder are “Dreamers” who came to this country as children.

One provision – the elimination of the deduction for state income taxes – particularly harms people in states like Minnesota that have relatively higher incomes and fund their public services through tax systems that are more equitable in how they treat residents across the income scale.

When both the tax implications and the likely cuts to services are taken into account, this is a plan that would exacerbate income inequality and do little to meaningfully improve the living standards of most Americans.

These aren’t the priorities that most Americans expect. Policymakers should sharpen their pencils and go back to work to craft a tax plan that doesn’t pave the way for deep cuts in health care and other crucial services, and that doesn’t provide big tax cuts for corporations and the wealthy at the expense of families living paycheck to paycheck.

-Nan Madden

About Nan Madden

Nan Madden is director of the Minnesota Budget Project.
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