Republican lawmakers a part of the tax-writing House Ways and Means Committee met virtually on October 26th to discuss making permanent the individual tax provisions in the 2017 tax reform bill.
The individual tax cuts included in the reform bill are scheduled to expire after December 31, 2025. Corporate tax cuts in the legislation were made permanent. Republican lawmakers now seek to even things out by making the individual provisions permanent.
Arguably, the most notable provisions set to expire after 2025 are the individual income tax rate reductions and the 20% deduction for certain pass-thru entities. Honorable mentions that are also set to expire are the increased Child Tax Credit and standard deduction, as well as the Alternative Minimum Tax exemption. (More about who could pay the AMT if it returns is here.)
During today’s meeting, lawmakers and a business owner talked about the importance to extend the pass-thru deduction and individual rate cuts, reverse the amortization of research and development costs (allow expensing), and return the interest deduction (163(j)) to pre-tax reform levels. Other tax measures were also mentioned.
Making these tax cuts permanent would be very expensive, which could be politically problematic (driving up debt as interest rates increase could haunt future re-election bids).
It is more likely that if these provisions are extended, they will be done annually, which essentially means that the entire individual tax code would become a tax extender.
A Repeat of 2010?
Extending the individual provisions in the 2017 tax reform bill is a definite ‘maybe.’
- President Barack Obama ran for office in 2008 promising to get rid of tax cuts benefiting wealthier taxpayers enacted into law under his predecessor, President George W. Bush. The bulk of those tax cuts were scheduled to expire after December 31, 2010.
- Upon taking office in 2009, Obama faced a historic recession that some economists said could have become a depression. As the Bush tax cuts neared expiration, the U.S. economy was slowly emerging from the Great Recession and there was concern that if all the Bush tax cuts expired it could weaken the economic rebound.
- To guard against a fallback into recession, President Obama extended all of the Bush tax cuts for two years in December of 2010. This extension occurred when Democrats controlled both chambers of Congress, i.e., many Democrats who wanted to end the Bush tax cuts voted to extend them. (Important to note, Democrats voted to extend the Bush tax cuts after suffering a huge loss in the 2010 mid-term elections.)
- President Biden, who was Vice President under President Obama, supported extending all of the Bush tax cuts in 2010 because of the severity of the recession.
- Economists today expect the U.S. economy to fall into a recession within the year.
- Allowing the individual tax cuts in the 2017 tax reform bill to expire in 2026 could be ill-timed if the economy is struggling to rebound from a recession - just like it was in 2010.
Will history repeat itself? It is too soon to tell.
Here are some questions that need answered to determine the fate of the 2017 individual tax cuts:
- Certain lawmakers are vowing to undo the individual tax cuts from the 2017 reform bill, but will they change their tune if the economy falls into a recession – like lawmakers did in 2010?
- If a certain political party has a tough election in November, will they be more inclined to extend the 2017 tax measures – again, like lawmakers did in 2010?
- Will President Joe Biden support extending the 2017 tax measures if the economy is in trouble – like he did the Bush tax cuts in 2010?