What a Democratic House Would Mean for Your Taxes

WSJ
The Tax Cuts and Jobs Act, passed near the end of 2017, won’t face repeal or replacement as Democrats are largely looking to make small changes to the law if they retake the House.
The Tax Cuts and Jobs Act, passed near the end of 2017, won’t face repeal or replacement as Democrats are largely looking to make small changes to the law if they retake the House. Photo: Chip Somodevilla/Getty Images

Last year, without a single Democratic vote, Congress reshaped the tax code, lowering individual tax rates, dropping the corporate tax rate to 21% from 35%, doubling the estate tax exemption, curtailing some deductions and revamping how businesses are taxed.

Now, Democrats are favored to regain control of the House in Tuesday’s election. If they do, what will it mean for taxes?

Here’s what Democratic control won’t mean: a repeal of the Tax Cuts and Jobs Act. The parties are too far apart on core tax-policy principles to enact sweeping legislation in a divided government. And Democrats largely aren’t promising to “repeal and replace” the tax law as Republicans did with the Affordable Care Act.

That’s partly because they saw that GOP promise become a political albatross and partly because there are pieces of the Republican tax law—a lower corporate-tax rate and expanded child tax credit, for instance—that appeal to many Democrats.

Here’s what it might mean: some changes around the edges of the law, particularly on the provisions set to expire by the end of 2019, and some partisan positioning on larger issues ahead of the next election.

Tax code sections set to lapse offer the best chances for a narrow compromise between the parties. That includes a tax credit for employers that provide family leave, an expanded deduction for medical expenses and breaks for alcohol producers. The family leave credit is new and Congress hasn’t had much chance to see whether it’s working. The medical expense deduction helps people with chronic and catastrophic illnesses and is politically popular.

Lawmakers have barely started staking out positions on most of these ideas, let alone attempted to negotiate over what extensions might look like.

Beyond that narrow set of issues, the tax debate in 2019 will likely be as contentious and politically charged as ever.

One fraught area for Democrats will be the deduction for state and local taxes, which the GOP law capped at $10,000, though that limit is set to expire after 2025. Combined with the higher standard deduction that was part of the tax law, that cap hits hardest in states such as New York, New Jersey and California, where property and income taxes often exceed $10,000.

Other changes in the tax law, including the narrowing of the alternative-minimum tax, mean that only a small minority in those states actually get tax increases. Nonetheless, repealing that cap is a rallying cry and any House majority will be won partly by taking suburban GOP seats where the cap is driving Democratic angst.

Tax Tracks

What to expect

Individual tax rates

Senate Democrats have already floated the idea of bringing it back to 39.6%, but it’s likely to meet opposition in a divided Congress.

Top rate set at 37%

Corporate tax rate

Senate Democrats already proposing an increase to 25% to help pay for infrastructure spending.

Set at 21%

Estate tax exemption

Democrats want to reverse this change, but President Trump has said he wants to repeal the tax.

State and local tax deduction

Democrats will likely press for repealing or raising the cap, while Republicans will resist.

Capped at $10,000 and not indexed for inflation. The change to this deduction hits hardest in high-tax states that are likely to prove the difference if Democrats retake the House

Individual tax changes

House Republicans already voted to extend them beyond 2025, but Democrats want to revisit last year’s law more thoroughly.

Many of last year’s tax cuts expire after 2025

Tax credit for employers for family leave; expanded deductions for medical expenses; breaks for alcohol producers

Expiring tax provisions may drive lawmakers toward some sort of tax legislation in 2019.

Set to expire by the end of 2019

What to expect

Individual tax rates

Senate Democrats have already floated the idea of bringing it back to 39.6%, but it’s likely to meet opposition in a divided Congress.

Top rate set at 37%

Corporate tax rate

Set at 21%

Senate Democrats already proposing an increase to 25% to help pay for infrastructure spending.

Estate tax exemption

Democrats want to reverse this change, but President Trump has said he wants to repeal the tax.

State and local tax deduction

Democrats will likely press for repealing or raising the cap, while Republicans will resist.

Capped at $10,000 and not indexed for inflation.*

Individual tax changes

Many of last year’s tax cuts expire after 2025

House Republicans already voted to extend them beyond 2025, but Democrats want to revisit last year’s law more thoroughly.

Set to expire by the end of 2019

Expiring tax provisions may drive lawmakers toward some sort of tax legislation in 2019.

Tax credit for employers for family leave; expanded deductions for medical expenses; breaks for alcohol producers

*The change to this deduction hits hardest in high-tax states that are likely to prove the difference if Democrats retake the House

What to expect

Individual tax rates

Top rate set at 37%

Senate Democrats have already floated the idea of bringing it back to 39.6%, but it’s likely to meet opposition in a divided Congress.

Corporate tax rate

Set at 21%

Senate Democrats already proposing an increase to 25% to help pay for infrastructure spending.

Estate tax exemption

Democrats want to reverse this change, but President Trump has said he wants to repeal the tax.

State and local tax deduction

Capped at $10,000 and not indexed for inflation.*

Democrats will likely press for repealing or raising the cap, while Republicans will resist.

Individual tax changes

Many of last year’s tax cuts expire after 2025

House Republicans already voted to extend them beyond 2025, but Democrats want to revisit last year’s law more thoroughly.

Set to expire by the end of 2019

Expiring tax provisions may drive lawmakers toward some sort of tax legislation in 2019.

Tax credit for employers for family leave; expanded deductions for medical expenses; breaks for alcohol producers

*The change to this deduction hits hardest in high-tax states that are likely to prove the difference if Democrats retake the House

What to expect

Individual tax rates

Senate Democrats have already floated the idea of bringing it back to 39.6%, but it’s likely to meet opposition in a divided Congress.

Top rate set at 37%

Corporate tax rate

Senate Democrats already proposing an increase to 25% to help pay for infrastructure spending.

Set at 21%

Estate tax exemption

Democrats want to reverse this change, but President Trump has said he wants to repeal the tax.

State and local tax deduction

Capped at $10,000 and not indexed for inflation*

Democrats will likely press for repealing or raising the cap, while Republicans will resist.

Individual tax changes

House Republicans already voted to extend them beyond 2025, but Democrats want to revisit last year’s law more thoroughly.

Many of last year’s tax cuts expire after 2025

Short-term changes†

Set to expire by the end of 2019

Expiring tax provisions may drive lawmakers toward some sort of tax legislation in 2019.

*The change to this deduction hits hardest in high-tax states that are likely to prove the difference if Democrats retake the House

† Tax credit for employers for family leave;

expanded deductions for medical expenses;

breaks for alcohol producers

Removing the cap cuts federal revenue and would be regressive, however, because the people who pay the most state taxes are the same high-income households that Democrats say got too much from the GOP tax law. More than half the benefits of repealing the cap would go to the top 1% of households, according to the Tax Policy Center, a research group run by a former Obama administration official.

Republicans are ready to point out that Democrats could be doing exactly what they often criticize—cutting taxes for the rich.

“They have got several decades of rhetoric on tax cuts for the rich that [Republicans are] waiting to unload,” said Rohit Kumar of PwC LLP, a former aide to Senate Majority Leader Mitch McConnell (R., Ky.).

Rep. Terri Sewell (D., Ala.), who represents a low-tax state, said Democrats would be able to find some “common ground” between representatives from high- and low-tax states as they address the state and local deduction.

“All of our constituents are struggling with the fact that this tax cut benefits the top 1%, not working families,” she said. “There are lots of ways that we could slice and dice this that would be fairer to working families wherever” they live.

Congress will also grapple with complaints from taxpayers unhappy about mistakes and complexities in the new law. For instance, some multinational companies that weren’t the primary intended targets of a minimum tax on foreign profits are getting hit with the tax. If the Treasury Department can’t solve their problem with regulations, they’ll knock on Democrats’ doors.

That’s a burden for Democrats, who will want to be responsive to problems weighing down the economy but reluctant to clean up anything they see as a Republican error.

“Where it gets complicated is: What do they do with some of the things that probably need to be revisited?” said Ray Beeman of EY LLP, a former Republican aide on the House Ways and Means Committee who developed a 2014 tax plan.

Democrats could exact a price from Republicans for fixing flaws in the 2017 law. The model here is the “grain glitch,” an error that gave cooperatives a competitive edge over farm-country businesses with other ownership structures.

Democrats, who had constituents affected by the problem, agreed to resolve it this year. But they scored a concession—an expansion in the low-income housing tax credit.

Democrats largely aren’t promising to “repeal and replace” the tax law as Republicans did with the Affordable Care Act.

The more seats Democrats have in the House and Senate, the higher a price they can command for each fix.

Under a Democratic House, Rep. Richard Neal (D., Mass.) would run the Ways and Means Committee, and he’s promising a thorough, cautious approach to reviewing the tax law, starting with hearings to explore how it is working and who is benefiting.

There also may be some voting that’s largely symbolic. Democrats will face pressure to produce tax legislation to pay for their proposed spending on infrastructure, health care and affordable housing. So even while Democrats explore broader changes, they’ll easily agree to vote for rolling back “the most regressive elements” of the tax law that benefit high-income taxpayers, said Seth Hanlon, a senior fellow at the Democratic-aligned Center for American Progress.

As an indication of where the party may be heading, Senate Democrats pitching an infrastructure plan already proposed raising the corporate tax rate to 25% from 21%, lowering the estate-tax exemption and raising the top individual tax rate back to 39.6% from 37%.

Those efforts won’t get past a Republican Senate or President Trump, however. In essence, Democrats would be testing ideas and searching for intraparty consensus. That would make the next two years a dry run for 2021, when Democrats hope to control the White House and Congress.

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Already, potential 2020 presidential candidates such as Sens. Cory Booker (D., N.J.) and Kamala Harris (D., Calif.) are floating tax ideas, and more will surely follow.

“You need to show your constituency what you believe in, but that may not necessarily be what you can get enacted with divided government,” said Melissa Mueller, a former aide to Mr. Neal who is now a lobbyist at Capitol Tax Partners. “They’re going to have to look for ways to do both, some ambitious bills that show what they stand for and some areas where they compromise to get smaller accomplishments.”

Republicans are currently favored to lose the House. But if they keep it, they’ve already signaled their intentions: They want to extend the individual tax cuts expiring after 2025, expand incentives for retirement savings and fix problems that crop up.

Mr. Trump is also now floating—without details—a 10% middle-class tax cut. Rep. Kevin Brady (R., Texas), chairman of the House Ways and Means Committee, said he’s working with the administration on the proposal and would advance it swiftly if Republicans hold the House and Senate.

Write to Richard Rubin at richard.rubin@wsj.com

https://www.wsj.com/articles/what-a-democratic-house-would-mean-for-your-taxes-1541163601?mod=pls_whats_news_us_business_f

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