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Monday, Nov 20, 2017
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Editorial: House's massive tax cuts are not tax reform

To hear U.S. House Republicans tell it, their new tax bill would fatten the savings accounts of average Americans and make paying for college a breeze. According to President Donald Trump, rich folks like him would hardly benefit at all. Of course, that's all a fairy tale. With little societal or fiscal justification, the legislation the House is expected to vote on this week offers generous breaks to the wealthy and corporations, with some crumbs left for middle class families. This is a fat stack of tax cuts masquerading as carefully sculpted tax reform, and it would add at least $1.5 trillion to the federal debt over the next decade. That bloat would surely come back to haunt us all in the form of cuts to Medicare and Social Security, once Republicans remember they used to be against exploding deficits.

The Tax Cuts and Jobs Act would reduce the number of tax brackets from seven to four, lower the corporate tax rate and eliminate several popular deductions and exemptions while adding some new ones. It is a net negative for many households, which may see a modest savings at first but could eventually end up paying more in taxes. And it cynically justifies the largesse lavished on the rich under the false promise of rapid economic growth. There is a great deal of work to do to make this legislation palatable.

Yet in its 429 pages, there are a few potentially positive changes to the tax code:

1. Reducing corporate tax rate.

Even President Barack Obama acknowledged that the U.S. corporate tax rate of 35 percent is too high. Lowering the rate to 20 percent would make the United States more competitive in the world. But the House bill does not close enough loopholes, so corporations would enjoy an even lower effective rate. More balanced tax reform would eliminate the loopholes so that companies pay a fair rate.

2. Lower limits on the mortgage interest deduction.

Homebuyers now can deduct the interest paid on primary home mortgages up to $1 million. That's an overly generous subsidy that experts say does not increase home ownership and only encourages people to buy more expensive homes. The bill would cap the mortgage interest deduction on new loans at $500,000.

3. Eliminating state and local income tax and sales tax deductions and limiting property tax deductions.

Under current law, taxpayers in states such as Florida, which has no state or local income taxes, end up subsidizing higher tax states. That's because residents in states like New York and California deduct what they pay to their state and local governments from what they send the IRS. Floridians don't have that option, and the sales tax deduction is open only to those who itemize. Bottom line: This change is good for Florida taxpayers.

Now for (a small sample of) the bad in the House bill:

1. Repealing deductions for uninsured losses and out-of-pocket medical expenses.

For Floridians, this is a gut punch. The House bill would no longer allow deductions for property damage not covered by insurance following a natural disaster. So if your roof peels off or your house floods in a hurricane, and insurance doesn't cover it, you're out of luck for even help on your taxes. Also potentially ruinous to Florida's 5 million seniors and others with serious health problems is the elimination of a deduction for out-of-pocket medical expenses. As it is, those expenses must meet a high threshold to be deductible, so the tax break now only helps those with catastrophic health problems. To Republicans, that is apparently an extravagance.

2. Petty cuts to legitimate middle-class benefits.

Student loan interest deduction, which saves families an average of $200 a year. Tax-free savings accounts for child care or elder care, worth about $1,200 for a middle-income household. Help with job-related moving expenses. Tax credits for college costs. Deduction for the money teachers spend, up to $250, on classroom supplies. The House plan eliminates all of these small but meaningful benefits.

3. What little help there is for average Americans has an expiration date.

One proposed benefit is a new $300 tax credit for filers and their dependents over age 17, such as elderly parents. But it sunsets after five years. The expanded child tax credit — $1,600, up from $1,000 — is not indexed to inflation, meaning its value could decline over time. Sen. Marco Rubio correctly believes it needs to be higher. And the plan uses an inflation adjustment measure that grows more slowly than the yardstick in current use, which economists say will result in an eventual tax increase. But the cuts to corporate rates and other business taxes? Those would be permanent.

The Senate last week released its own tax reform framework, which is slightly less insulting to middle-class Americans. It would retain the deductions for student loan interest and medical expenses and leave the mortgage interest deduction as is. The child tax credit would be worth $50 more than under the House proposal. But the Senate bill still reflects misplaced priorities, lowering the income tax rate for millionaires and narrowing the class of high-income Americans who are subject to the estate tax. Redirecting this debate to put the interests of average taxpayers first will require leadership. But Trump, though he has paid lip service to helping the middle class, is desperate for a legislative win and is likely to sign just about anything Congress delivers.

The U.S. tax code should be updated to make it simpler and fairer, and to help American companies compete. But Congress is pursuing large tax cuts rather than responsible tax reform, picking the pockets of students, seniors, homeowners and working parents to finance sweeping cuts for corporations and the richest Americans.

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