Tax provisions affecting individuals and small businesses originally enacted as part of the Tax Cuts and Jobs Act (TCJA) of 2017—along with the state and local tax (SALT) deduction cap—would be made permanent under legislation reintroduced this month by House Ways and Means Committee Vice Chairman Vern Buchanan (R-FL), above. (The Bond Buyer, Feb. 13 and Legislative Text)
The TCJA Permanency Act
- Buchanan’s bill (H.R.976) includes a Roundtable-supported provision to make permanent the 20 percent deduction for qualified pass-through business income (Section 199A). The legislation would also permanently lower tax rates for individuals and families and maintain the higher standard deduction.
- There are currently 83 co-sponsors of The TCJA Permanency Act. Buchanan has led five of the six Ways and Means Subcommittees and currently sits on the Joint Committee on Taxation, a small group of the most senior tax policy writers in Congress. (Buchanan news release, Feb. 13)
- Without Congressional action, 23 different provisions of the 2017 Republican tax law are set to expire after 2025, including the SALT deduction cap. Buchanan originally filed legislation to make the TCJA cuts permanent last September during the Democratic-controlled 117th Congress.
- Buchanan stated that funding for the Federal Aviation Administration could be a legislative vehicle to attach the TCJA bill, since no major standalone tax bills are expected this year. (BGov, Feb. 23)
SALT Caucus Relaunched
- More than 20 members of the House relaunched the SALT Caucus this month as part of their push to repeal the $10,000 cap limit on the federal deduction for state and local taxes. (News conference video, Feb. 8 and Tax Notes, Feb. 9)
- The cap is scheduled to sunset after 2025, but SALT caucus members want relief sooner while pledging to fight attempts to extend the cap. (Rep. Gottheimer news release, Feb. 9)
- “I like the odds of having a bunch of new Republicans from states that need to restore SALT,” said SALT Caucus Co-Chair Josh Gottheimer (D-NJ). “So if you want to talk, this is the caucus to talk to to get this done, to restore SALT and make life more affordable.” (Roll Call, Feb. 8)
More than 30 states and local jurisdictions have enacted a SALT workaround for pass-through businesses, S-corporations, and some LLCs. (CNBC video Feb. 13)
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Congressional Republicans this week proposed legislative measures—aimed at helping middle-class savers and spurring investment without further increasing inflation—as a precursor of GOP economic policies that may be promoted during the fall’s midterm elections. Senate and House announcements on inflation followed last week’s Labor Department report showing the consumer price index reached 8.6 percent in May. In response, the Federal Reserve raised interest rates by 75 basis points, its largest hike since 1994. (Wall Street Journal and Tax Notes, June 14 | CNBC, June 15)
Senate GOP Proposal
- This week, Sens. Chuck Grassley (R-IA), John Barrasso (R-WY), Steve Daines (R-MT), and James Lankford (R-OK) introduced the Middle-Class Savings and Investment Act. The legislation aims to help the middle class through tax cuts and savings incentives, paid for by extending the current $10,000 cap on the deduction for state and local taxes. (Sen. Grassley news release, June 14)
- The Republican-introduced bill would:
- Expand the Zero Rate Bracket for Capital Gains and Dividend IncomeThe legislation would increase the size of the zero percent tax bracket for long-term capital gains and qualified dividends. Under the proposal, a married couple with income under $178,000 would not owe tax on capital gains and dividend income.
- Provide Relief from the Net Investment Tax for a Married CoupleThe legislation would exempt the first $400,000 earned by a married couple from the 3.8 percent net investment income tax that otherwise applies to capital gains, dividends, and passive rental income. Currently, the first $200,000 earned by an individual and $250,000 earned by a married couple is exempt from the tax.
- Create and Expand Tax Relief for Interest Income and Retirement SavingsThe legislation would allow individuals to exclude up to $300 ($600 if married) of interest income from taxation. Additionally, the bill would expand the tax credit that encourages low-income taxpayers to contribute to a qualified retirement account. (Backgrounder on the Senate legislation)
- The bill would be paid for by extending the current $10,000 cap on the deductibility of state and local taxes for three years, or however long is needed. The deduction is scheduled to expire at the end of 2025.
House Republican Outline
- On June 14, House Ways and Means Committee Republicans released a one-page document outlining a six-point plan to combat inflation. The GOP calls for repurposing $170 billion in unspent pandemic federal aid for deficit reduction while pursuing permanent tax relief. The list of principles also urges policymakers to reject the Biden administration’s proposed overhaul of the tax code affecting corporations and wealthy individuals. (BGov, June 15)
- The proposals to fight inflation by congressional Republicans seek to provide a contrast to the approach by Democrats, which includes cutting prescription drug costs and increasing taxes on oil company profits. (PoliticoPro, June 14)
The Roundtable’s Tax Policy Advisory Committee (TPAC) met today in conjunction with The Roundtable’s 2022 Annual Meeting to discuss policy issues affecting the taxation of commercial real estate. (See story above).
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Several Democratic Senators favor retaining current law as it relates to the deductibility of state and local taxes and eliminating SALT relief from any pared down version of the Build Back Better (BBB) Act, The Hill reported on Jan. 26.
- Speaking both on the record and anonymously to The Hill, policymakers said that they expect proposed changes to SALT will be cut from the next generation of the BBB Act, despite the issue being a top priority of Senate Majority Leader Chuck Schumer (D-NY).
- The 2017 Tax Cuts and Jobs Act limited the itemized, individual deduction for state and local taxes (including property taxes) to $10,000. The provision does not restrict the deductibility of business taxes paid or incurred at the entity level. The limitation expires after 2025. (The SALT Cap: Overview and Analysis, Congressional Research Service, March 6, 2020)
- Sen. Joe Manchin (D-WV), a key centrist vote in the Senate, has not publicly stated his position on SALT relief, but reportedly has sent signals he is not a supporter. (Politico, Jan. 27 and Roll Call, Jan. 28)
SALT & BBB
- If negotiations resume, congressional Democrats are expected to reduce the size and scope of the BBB Act. Manchin recently said he prefers “starting from scratch” after Democratic negotiations on the House-passed $2.2 trillion package collapsed in December. (Roundtable Weekly, Jan. 21)
- There are also challenges in the House, where Democrats have only a four-vote majority. “No SALT, no deal,” wrote New York Rep. Tom Suozzi and New Jersey Reps. Josh Gottheimer and Mikie Sherrill in a joint statement last week. “If there are any efforts that include a change in the tax code [in a revised BBB proposal], then a SALT fix must be part of it.” (CNBC, Jan. 21)
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President Joe Biden this week met with a bipartisan group of policymakers about the details of his multitrillion infrastructure proposal as a bloc of moderate GOP senators stated they are developing a far less expensive counterproposal that would pare back the definition of what comprises “infrastructure” and fund it with unspecified user fees. (Washington Post, April 14)
- Sen. Mitt Romney (R-UT), who is involved in talks about an alternative infrastructure plan, said, “The pay-for ought to come from the people who are using it,” suggesting that a transportation mileage charge could be applied to electric vehicle drivers. “Clearly by bringing in additional revenue from actual miles driven is going to create some additional revenue,” Romney said. (Politico Pro, April 14)
- Rep. Donald Payne, Jr., chairman of the House Transportation Subcommittee on Railroads, attended the White House meeting where President Biden said he was “prepared to negotiate” on his new infrastructure-focused economic plan – and expressed support for the Gateway project, a major rail tunnel project between New York and New Jersey. (BGov, April 12)
- An effort by members of Congress to repeal the cap on state and local tax deductions (SALT) is adding to the complexity of negotiations over the White House infrastructure proposal. Yesterday, a bipartisan congressional “SALT caucus” was launched to push for the full repeal of the $10,000 limit on state and local deductions, which was enacted as part of the 2017 Republican tax overhaul. (Bloomberg, April 15)
- It is unclear how many members of the bipartisan caucus would link their support for Biden’s infrastructure proposal, and its increased corporate taxes, to action on the SALT cap. Reps. Josh Gottheimer (D-NJ) and Tom Suozzi (D-NY), who co-chair the SALT caucus, said they “will not accept any changes to the tax code that do not restore the SALT deduction.” (CNBC, April 15)
- Additionally, several New York Democrats sent a letter to House leadership on April 13 urging for a full repeal. “We will not hesitate to oppose any tax legislation that does not fully restore the SALT deduction,” according to the letter. (BGov and Wall Street Journal, April 13)
- The White House’s infrastructure plan and the importance of energy efficient buildings was noted in a recent New York Times interview with White House National Economic Council Director Brian Deese.
- Deese stated during the April 9 Ezra Klein Show (podcast), “… it’s been true for multiple years that energy efficiency upgrades in commercial buildings should just happen, and they’re not. The built environment and industry get less attention but are extraordinary opportunities. And this [infrastructure] plan has a very significant investment in upgrading buildings and making them more energy efficient.”
- He added, “The jobs doing that happen all around the country. They’re construction jobs, building trades. A lot of it is actually high-value investment, where providing an incentive could actually unlock a bunch of private capital to invest, particularly in the commercial building space.”
- Deese is scheduled to participate in next week’s Roundtable Spring Meeting, along with U.S. Department of Transportation Secretary Pete Buttigieg. The remote discussions will be available on The Roundtable’s YouTube channel by April 21.
The Roundtable is part of the Build by the 4th coalition, led by the U.S. Chamber of Commerce, which encourages the Biden Administration and Congress to pass a comprehensive infrastructure deal by Independence Day 2021.
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The Treasury Department and IRS in a recent notice indicated their intent to issue proposed regulations clarifying that state and local income taxes imposed on, and paid by, a partnership or an S corporation are deductible in computing the partnership or S corporation’s taxable income. (IRS Notice 2020-75)
- The announcement has important implications for real estate and other businesses operating in States with high state and local income tax burdens. The Tax Cuts and Jobs Act of 2017 limits taxpayers’ ability to deduct state and local taxes (SALT) paid at the level of the individual taxpayer to no more than $10,000.
- The SALT limitation in TCJA applies to state and local taxes owed on individual wages, as well as state and local taxes paid on business income distributed to partners or S corporation shareholders. In contrast, state taxes on corporate income remained deductible under the 2017 legislation. However, prior to Notice 2020-75, it was unclear whether the SALT limitation applied to entity-level income taxes imposed on, and paid directly by, a partnership or S corporation.
- The Treasury announcement is an important step towards creating a more level playing field between publicly held C corporations and privately held pass-through businesses.
- Over the last three years, several States have modified their tax laws to allow partnerships, S corporations, and LLC’s to pay tax on their business income at the entity level. States adopting an entity-level tax on pass-throughs include Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island, and Wisconsin. In most cases, the regimes are elective. (CNBC, Nov. 18)
- Uncertainty about the federal tax treatment of these regimes has limited their effectiveness. That could change quickly with the new Treasury guidance. Similar legislative proposals are pending in Alabama, Arkansas, Michigan, and Minnesota and more may follow in light of Treasury’s clarification. Entity-level regimes that comply with the Treasury regulations could help restore SALT deductions for a significant share of pass-through business income.
Other tax and economic policy issues affecting real estate were addressed this week in a CBRE panel discussion that featured Roundtable Senior Vice President and Counsel Ryan McCormick and other industry experts. (video)
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[Above: Members of the House Ways and Means Committee, including Chairman Richie Neal (D-MA), top center, and Ranking Member Kevin Brady (R-TX), top right.]
Prospects for a year-end tax bill are uncertain as congressional leadership and the Trump Administration expect to reveal details of a nearly $1.4 trillion FY2020 spending deal next week. Meanwhile, the House Ways and Means Committee on Dec. 11 approved a temporary suspension of the $10,000 deduction cap on state and local taxes (SALT) enacted in the 2017 tax reform bill.
- The Restoring Fairness for States and Localities Act (H.R. 5377) passed Ways and Means on a mostly party line vote of 24-17. The bill would raise the SALT deduction cap from $10,000 to $20,000 for married couples in 2019 and repeal the limit entirely for 2020 and 2021.
- The measure’s costs would be offset by an increase in the top individual tax rate from 37 percent to its pre-2017 tax law level of 39.6 percent through 2025, when tax provisions in the 2017 tax overhaul are set to expire. (The Hill, Dec. 11)
- A description of the proposed changes to the SALT cap and top rate bracket are available from the Joint Committee on Taxation.
- H.R. 5377 is expected to pass the House if it gets a vote next week on the House floor. The House Rules Committee has announced a hearing on the bill for December 16. However, the GOP-led Senate is unlikely to consider the legislation. (BGov, Dec. 11)
- If any tax measures are to be enacted this year, they would likely have to ride on an “omnibus” spending bill, which may be broken into two packages for votes next week before Congress is scheduled to recess on Dec. 20.
- Disagreements between House Democratic and Senate Republican tax-writers over what measures should have priority, combined with the large number of tax items competing for consideration, are complicating prospects for agreement.
- Senate Majority Whip and Finance Committee member John Thune (R-SD) on Dec. 12 said, “At the moment, nothing’s happening.” (Deloitte Tax News & Views, Dec. 13)
- Senate Finance Committee member Sherrod Brown, (D-OH) commented to reporters Dec.12 about what tax measures are under negotiation. “It’s still all over the place,” Brown said. Committee member Sen. Rob Portman (R-OH) stated, “I’m frustrated because I don’t think we have an agreement yet on anything.” (Tax Notes, Dec. 13)
A summary of the expired and expiring tax deductions, credits, and incentives that would be renewed through 2020 under the Taxpayer Certainty and Disaster Relief Act (H.R. 3301), which the House Ways and Means Committee approved on June 20, is available from Deloitte Tax LLP.
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