Uphill Battle: Tax Reform 2.0Download the PDF
The Tax Cuts and Jobs Act of 2017 whipped through Congress and onto President Trump’s desk at warp speed by Washington standards. Introduced in November, it was signed into law 52 days later. Now comes what looks to be the harder part: making all of those changes permanent, via a package of legislation the majority Republican party has nicknamed Tax Reform 2.0.
Republicans were able to speed their initial tax reform bill through Congress so quickly, explains Sarah Babbage, a legislative analyst with Bloomberg Government. They used a procedure called budget reconciliation, which let the bill pass with 51 votes in the Senate—none of them from Democrats. Under that procedure, Republicans had to set a limit on how much revenue the measure could lose over the next decade—a limit they set at $1.5 trillion. To make that work, they had to make the changes on the individual side of the tax code temporary, expiring after 2025. For the most part, only the tax cuts for C corporations were permanent. Under Tax Reform 2.0, the GOP would now like to make individual tax cuts permanent, create new tax breaks for new businesses, fix some drafting errors in the first piece of legislation, and make a wide range of changes to the rules around retirement savings plans.
Speaking at the 2018 SVIA Fall Forum in October, Babbage said the contemplated changes to the retirement landscape have more bipartisan support than many of the other measures, and she suggested the GOP may push to make them law if they retain control of the Senate and lose control of the House in the upcoming midterm elections.
Perhaps the most far-reaching of those changes would make it easier for small employers to join together to create pooled retirement plans similar to existing multi-employer plans—except that now those employers would not have to be from the same industry. The proposed legislation also would give employers relief from the so-called “one bad apple” rule, so that if one employer in a pooled plan ran afoul of Internal Revenue Service rules around those plans, other employers in the plan wouldn’t be punished.
Other retirement-related measures contemplated in Tax Reform 2.0, Babbage said, would allow graduate students to contribute money from their fellowships and stipends to Individual Retirement Accounts, repeal the maximum age for making traditional IRA contributions (currently 70½), bar loans from retirement plans made on credit cards, eliminate required minimum distributions from retirement plans after age 70½ for people with account balances under $50,000, and provide some tax credits for small employers who start pension plans or automatically enroll employees in their retirement plans.
Still other proposals would loosen non-discrimination testing requirements around retirement plans, create universal savings accounts to which individuals could contribute up to $2,500 per year, allow people to withdraw as much as $7,500 from their retirement account after the birth or adoption of a child, expand the list of expenditures eligible for favorable tax treatment within 529 college savings plans, and allow contributions to 529 plans on behalf of unborn children.
Babbage said the bill to make the 2017 individual tax cuts permanent is unlikely to pass in the Senate this year because Republicans cannot use the budget reconciliation procedure, and they would be unlikely to win sufficient votes from Democrats to carry the measure. The proposals that might have a chance of passing this year yet, she said, would probably be those that would provide some tax credits to small employers who start pension plans or automatically enroll employees in retirement plans.
Even though the proposal to expand tax breaks for new businesses, and some others that would relax some of the rules around medical savings accounts, would appear to have some bipartisan support, Babbage noted that the only bills introduced in those areas so far have been in the House. Without corresponding legislation in the Senate, she said, it’s unlikely they will pass anytime soon.
One thing the Senate may take up, Babbage said, is legislation to overhaul the Internal Revenue Service (IRS). “That’s because the top tax writer in the Senate, Orrin Hatch, is retiring at the end of his term, and he really wants to improve the IRS and its functions as his legacy before he leaves.” Contemplated legislation would require the IRS to put more of their services online, beef up their identify theft and fraud prevention work, and make some changes in the way the agency is organized and conducts enforcement.