The voices of Tax Policy Center's researchers and staff
The House Ways & Means Committee’s proposed tax bill is routinely described as a $1.5 trillion tax cut. But to understand why the GOP is having such a hard time writing the bill, think of it a bit differently: It is a combination of a massive $5.8 trillion gross tax cut and a very large $4.3 trillion tax increase.
This is a risky gambit for a party whose leaders want a quick and visible “win” on tax policy. Because the bill combines a large tax cut with a substantial tax increase – as opposed to just cutting taxes more modestly for most households and businesses without countervailing revenue increases—the politics is much more difficult for two reasons.
First, those that would benefit from the proposed changes have been offered very large tax cuts – and will resist giving them up during the coming negotiation process. The gross tax cuts (the $5.8 trillion) of the House Ways and Means bill would be 2.4 percent of Gross Domestic Product over the next decade. By comparison, President George W. Bush’s 2001 plan cut taxes by 1.8 percent of GDP over its first decade.
Second, House Republicans will need to garner support for its proposals to substantially increase some taxes. For individuals, these include repealing most credits, including those for adoption and purchasing electric vehicles, limiting the mortgage interest deduction, and eliminating deductions for student loan interest, medical expenses, state and local income and sales taxes, and capping property tax deductions. For businesses, it would repeal deductions for domestic production activities, and entertainment and miscellaneous fringe benefits, limit interest deductions, and create a new excise tax on private university endowments. By attacking all those entrenched preferences, House Republicans are creating a coalition of tax bill opponents and making a bill much harder to pass.
As a result of all of these moving parts, the Tax Policy Center estimates that a large number of households would be worse off after the tax cuts--(even before considering how the additional government borrowing would be financed. TPC estimates that 7.3 percent of tax units would face higher taxes averaging $2,140 in 2018. Individuals in all income groups would face tax increases, though the greatest share is concentrated among those in the second quintile. By 2027, 25.5 percent of tax units would face tax increases averaging $2,080.
Now, imagine an alternative: What if the House GOP simply tried to cut business and individual taxes by $1.5 trillion. No offsets needed. They could have distributed small tax cuts to middle-income individuals by, say, modestly expanding the earned income tax credit and raising the standard deduction. And they could have trimmed the top corporate tax rate by a few percentage points. It would not have been base-broadening tax reform, but neither is the current bill.
The GOP tax plan is, on net, a massive tax cut accompanied by a large tax increase. As it is debated in the coming weeks and months, stakeholders on all sides will make demands to maintain the tax cuts and trim or eliminate the tax increases. Tax reform is never easy, but crafting the bill this way has vastly increased the challenge of passing it.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
AP Photo/Elise Amendola, File