Senate Battles Over Stale-Mated Tax Reform

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In a defensive move in the Senate Tuesday, Democrats promised to try to block tax code rewrites that repeal the estate tax, as well as deductions for state and local taxes. They claim repealing those measures would not fulfill the Republican promise to grant the middle-class tax relief.

Congressional Republicans and the White House plan to release their tax plan framework in late September, which is why Trump dined with both Republicans and Democrats on Tuesday night. More influence for Democrats means they can issue more demands.

The White House and Republicans want to kill the estate tax, claiming that it harms small businesses and family farms. Democrats volley with the claim that the estate tax only affects the wealthiest Americans.

The estate tax is at 40%, which may sound high, but the first $5.49 million is exempt from taxation. For a couple, that threshold rises to $11 million. The estate tax affects only a few thousand wealthy estates each year—small businesses and family farms would rarely fall into that category.

In addition to keeping the estate tax on the books instead of giving tax breaks to the wealthiest (instead of the middle class), Democrats want to protect the deduction for state and local taxes as well as changes to the mortgage interest deduction.

If the Democrats try to block the Republicans’ efforts, or if they can’t get 60 votes, Treasury Secretary Steven Mnuchin told CNBC that Republicans would use reconciliation to bypass a filibuster.

Despite the fact that both sides are butting heads and the plan is due to be unveiled, Republicans haven’t been able to agree on their tax plan, setting the stage for a failure similar to their inability to repeal and replace Obamacare earlier this year. Trump wants to cut the tax rate to 15%, but Senator Paul Ryan is pushing for a rate somewhere in the mid-twenties. Additionally, Republicans have yet to iron out how hedge fund fees (a.k.a. carried interest) will be taxed. At present, they’re taxed not as income, but as capital gains.

Another minefield in the new tax plan is that wealthy individuals could classify themselves as small businesses to take advantage of possible loopholes that would allow them to enjoy a much lower tax rate.

Before the tax code can be overhauled, Congress must first pass a budget resolution that would allow the plan to pass with a Senate majority, as opposed to the typical 60 votes. That move can’t happen until the specifics of the planned tax reform are ironed out.

Source: The New York Times

Image Source: 401kcalculator.org via Flickr

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