Policy, Budget Impacts of GOP Tax Bill Key Provisions

The House Ways and Means Committee shared a portion of its plans to address expiring provisions of the 2017 Tax Cuts and Jobs Act and make other tax reforms — with a more extensive, 389-page draft shared yesterday. Ways and Means is slated to mark up the bill this afternoon.

The proposed legislation — just one component of a reconciliation bill to be pieced together by House committees, aligning with instructions in a recently-passed budget resolution — extends and revises several individual and business tax provisions.

Ways and Means released the full text before a markup set for 2 p.m. on May 13. Included are provisions increasing the state and local tax (SALT) deduction cap and phasing out and repealing several green energy credits. The full draft also includes Trump campaign promises of no tax on tips and overtime, and an “enhanced deduction for seniors.”

The Joint Committee on Taxation (JCT) has produced detailed analyses of the May 9 and May 12 draft legislation. And policy groups and lawmakers also have been unpacking the proposals.

Here are a few key areas to watch, along with some initial reactions.

Child Tax Credit.

The proposal would increase the Child Tax Credit to $2,500 per child through 2028. For years after, it would set the CTC at the TCJA level of $2,000 per child, indexed to inflation.Under current law, the CTC will revert to $1,000 per child in 2026.

To claim the CTC, a taxpayer, their spouse (if filing jointly), and the child must supply a Social Security number. The bill also makes permanent the $1,400 Additional Child Tax Credit (indexed to inflation) and the $2,500 threshold for refundability.

The proposal also would make the $500 credit for other dependents permanent (but not indexed to inflation).

The Niskanen Center’s Josh McCabe told Checkpoint that the changes are “a step in the right direction.” He welcomed the move to index the CTC to inflation “to prevent future erosion” and bring the credit “in line with the other major provisions of the tax code.” He added that “one opportunity for improving it as it makes its way through the reconciliation process would be to permanently increase it to $2,500 and index this amount going forward.”

On the Social Security number requirements, McCabe noted the draft goes farther than the TCJA, which just required a Social Security number for the qualifying child. He explained that while the change is “connected to an anti-immigration backlash in this case,” such requirements are “standard practice for claiming child credits around the world.”

The Hamilton Project’s Robert Greenstein was more critical. The proposal would increase the Child Tax Credit to $2,500 per child, but as drafted, it “would result in no increase in the credit at all for millions of children in low-income working families,” he said in a May 12 post. In addition, “the poorest 20 percent of families with children overall would receive just 2 percent of the new CTC benefits,” Greenstein added. He called out the CTC phase-in — or refundability provisions — as the source of the problem.

The Urban Institute’s Margot Crandall-Hollick agreed with that critique. “Because the bill text released May 9 makes no changes to how the credit phases in with earnings for low-income families, it provides no additional benefit to the 17 million children currently left out of fully benefiting from the CTC,” she told Checkpoint. “This despite research showing these investments can be enormously beneficial for kids, families, and society more broadly,” she added.

Crandall-Hollick noted that “that phasing in the credit faster … delivers benefits mostly to families with low incomes at relatively modest cost.” She pointed to some ideas in last year’s Wyden-Smith bipartisan tax reform bill (H.R. 7024).

The Center on Budget and Policy Priorities’ Kris Cox also cited last year’s effort. She noted that “169 House Republicans voted for bipartisan legislation… that would have increased the credit for the vast majority of the 17 million children in working families who get less than the full credit.” Conversely, the May 9 proposal “locks in the provision that limits kids in families with lower incomes to a lower max credit — aka the refundability cap,” said Cox.

Section 199A deduction.

Code Sec. 199A under the TCJA allows individuals, trusts, and estates to deduct 20% of qualified business income from certain pass-through entities. Taxpayers may also deduct 20% of qualified real estate investment trust (REIT) dividends and qualified partnership income.

The Section 199A deduction is among the expiring provisions of the 2017 bill, meaning the benefit will not apply to tax years beginning January 1, 2026, absent congressional action.

The Ways and Means proposal would make the qualified business income deduction permanent, including the deduction for income from domestic production activities conducted by agricultural or horticultural cooperatives.

It also raises the percentage for calculating the deduction from 20% to 22%, according to the text released Friday and analyzed by the JCT. Monday’s full text indicates this amount is instead 23%, however.

The proposal also amends the phase-in limitations by providing a two-step calculation process. Taxpayers with incomes in excess of the threshold would be required to first “apply the greater of the W-2 wages or W-2 wages and capital investment test to calculate the deductible amount for each qualified trade or business,” the JCT explained.

Next, taxpayers would reduce “the sum of the deductible amounts (but not below zero) from all trades or businesses (including specified service trades or businesses), by a limitation phase-in amount, equal to 75 percent of the excess of taxable income over the threshold amount.”

Finally, taxpayers would be able to include qualified business development company interest dividends with REIT and publicly traded partnership income when calculating the Section 199A deduction.

These changes would take effect beginning tax year 2026 with threshold amounts indexed for inflation.

According to NYU Tax Law Center Executive Director Chye-Ching Huang and Senior Attorney Advisor Miles Johnson, the modifications make the deduction “more generous and more available to higher-income taxpayers (particularly white-collar service providers) than it is under current law.”

Raising the amount of the deduction above 20% benefits those with higher incomes, they said. And because the proposal “would eliminate the phase-out cap and calculate the phase-out based on a flat percentage,” the change further benefits “higher-income taxpayers whose pass-through business income makes up a larger share of their overall income,” wrote Huang and Johnson.

Distributional effects and budget effects.

Policy experts also looked at who would get the most benefits under the May 9 proposal.

According to the Tax Policy Center’s Howard Gleckman, “more than two-thirds of the plan’s tax cuts would go to those making about $217,000 or more” while “those making more than $1.1 million, would get nearly one-quarter of the tax cuts.”

Under the bill, the top 1% would see a tax cut of almost 5% or over $100,000, said Gleckman in a May 12 post. Meanwhile, low-income households could see a tax cut of just 0.6% or $120, while middle-income households would see a tax cut of 1.7% or $1,300.

These estimates largely align with JCT’s analysis of the proposal. In 2027, those making under $15,000 would see their tax rate drop just 0.3% on average, according to JCT. Meanwhile the same year, those earning $1 million or more would see their rates drop an average of 3.4%. The discrepancy in benefits based on income level continues through 2033, according to JCT calculations.

In total, the JCT estimated the combined tax provisions will incur approximately $4.92 trillion in net revenue losses through fiscal year 2034. Provisions with the highest costs are the extensions to the TCJA income tax rates ($2.18 trillion), increased alternative minimum tax exemption and phase-out thresholds ($1.41 trillion), and standard deduction enhancements ($1.26 trillion).

The greatest offset would be revenues gained from the termination of the deduction for personal exemptions, which the JCT forecast would bring in nearly $1.88 trillion through fiscal year 2034.

Projections from the Committee for a Responsible Federal Budget (CRFB) calculated prior to the JCT revenue estimate anticipated the combined budget impact to be a net deficit increase of $5.1 trillion through the same year. If the provisions were made permanent, however, this figure would rise to $5.5 trillion, said the CRFB.

For example, expansions to the standard deduction and the CTC would “add about $300 billion to the deficit impact of [the] extension as written but roughly $700 billion if made permanent,” the CRFB forecast.

As noted by William McBride, chief economist at the Tax Foundation, in written comments shared with Checkpoint, the Section 199A changes “as scored over the weekend would cost $786 billion.” This reflects an increase of 22%, not 23% as drafted in Monday’s text.