Update: D.C.’s Tax Reform Sausage Making May Still Work Out

In a previous blog post I reported details of the GOP federal tax reform plan — with some commentary — a few hours after Capitol Hill leaders announced the details. Much has happened since then, including a new analysis by the Washington, D.C.-based Tax Foundation. In addition, the big news from yesterday is that the Senate announced it would include a repeal of the Accordable Care Act (Obamacare) individual mandate in its version of the plan.

The Tax Foundation on Monday released its analysis of the Senate version of the Tax Cuts and Jobs Act. It concluded that the Senate’s version of reform would lead to 925,000 new jobs and would result in a 4.4 percent increase in net income through 2020. Specifically, it estimates that Michigan would see more than 27,000 new jobs in the state and an after-tax income gain of $2,512 per family with a middle income.

A graphic posted on the Tax Foundation’s website breaks the tax reform down to several different scenarios. These include the single person with a low income and the married couple with a high income, and in each case, the graphic explains how the tax burdens play out under scenarios involving the standard deduction. The Foundation reports that a single tax filer making $30,000 and taking the standard deduction would see a drop in tax liability of 9 percent and enjoy a 1.3 percent increase in after-tax income. On the other end of the economic scale, a married couple with a $2 million income and an itemized return would see their tax bill increase by 1 percent and their tax liability drop by 0.3 percent.

One move with unpredictable results came yesterday when senators announced they would address health care reform in the tax plan. The Senate version of tax reform will include a repeal of the controversial individual mandate that is part of the Affordable Care Act. It is estimated this change will lead to a decrease in Medicaid costs and Obamacare subsidies paid out for insurance and thus, a decrease in the federal deficit of $338 billion over 10 years.

This late move has baffled tax policy analysts and others. An Obamacare mandate repeal had not been part of previous tax plan discussions. And for good reason. It muddies up the overall debate, draws attention to what might happen to uninsured Americans in the future, and it may weaken the prospects for a more sweeping and positive national health care reform down the road. Perhaps worse, this questionable move may pave the way for more, worse amendments.

Sen. Rand Paul, a Republican from Kentucky, for instance, has suggested using savings from eliminating the mandate to allow some deductions for state and local taxes. This tax deduction should be repealed. Almost one-third of its benefits accrue to income earners in just two states, New York and California, according to the Tax Foundation. At the individual level, most benefits accrue to high-income earners. Repealing SALT completely is the ideal change, though Sen. Paul and others appear set on keeping it to some degree.

Another component of the current tax law that appears set to survive, but should not, is the estate tax. The Senate plan keeps the estate tax but doubles the size of the exemption.

The federal tax plan is moving forward and key, vital provisions — such as rate changes to personal and corporate income taxes — remain intact. Will repealing the Obamacare mandate improve its chances? I don’t know, but I remain optimistic, if also ever vigilant over politicians’ ability to snatch defeat from the jaws of victory.