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Tax Reform 2.0 Focuses on Retirement, Education, and Innovation


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9/13/2018
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Tax Reform 2.0 Focuses on Retirement, Education, and Innovation

The House Ways and Means Committee last Thursday provided Republicans with an updated version of Tax Reform 2.0.  The legislation is divided up into a package of 3-4 separate bills.

Kevin Brady (R-Texas) released an outline of "Tax Reform 2.0" before the August recess and said he plans to release legislative text early next week.  The legislation is scheduled to go to a vote sometime in the next few weeks or in early October.

"It's full steam ahead on 2.0 because the main question here is, will we make tax cuts for families and small businesses permanent as we did for corporations? The answer is yes," Brady said. "Plus, it's incredibly pro-growth."

"This legislation is our commitment to the American worker to ensure our tax code remains the most competitive in the world," Brady said in a statement.

“We’re not resting on our laurels,” said House Majority Whip Steve Scalise. “We’re seeing this great economic growth and so we’re starting to put together Tax Cuts 2.0.”

Here are some of the key proposals Republicans plan to include in the expanded bill:

  • Removal of IRA Contribution Age Limits: The Family Savings Act of 2018 contains several Tax Reform 2.0 provisions that will affect how individual retirement accounts work.  Removing the age limit on IRA contributions is one of them. Currently, account owners cannot make additional contributions beginning in the year they turn 70½. Roth IRAs, by contrast, do not have a contribution age limit.
  • Infant and Toddler Care Costs: Allowing families to access their retirement accounts, penalty-free, for costs related to a new child, whether by birth or adoption.
  • Universal Savings Accounts: Creating a new Universal Savings Account that would allow savers to set aside tax-advantaged money for basically anything. These accounts, which Congress has explored in the past, would be taxed only once, and would come without restrictions or complex rules & limitation on when (or why) the owners can make use of it. 
    • Problems with Retirement Accounts Today: The variety of retirement accounts and their ever-changing and rigid rules, restrictions and limitations are all-but-impossible for prospective sponsors to understand or keep up with – and why would you want to sign up for that headache?  Most small employers cannot set up a 401(k) or one of the sixteen other varieties of retirement plans which each come with a patchwork of complex rules, causing their availability to the public to be severely limited.  In fact, in testimony before Congress, this was listed as one of the main reasons the use of plans do not enjoy more widespread use by small business. See David Burton, “The Tax Code as a Barrier to Entrepreneurship,” testimony before the Committee on Small Business, U.S. House of Representatives, February 15, 2017, https://www.heritage.org/testimony/the-tax-code-barrier-entrepreneurship.
    • Executive Action on the Issue: On August 31, 2018 the President signed an executive order entitled “Executive Order on Strengthening Retirement Security in America” that was aimed at increasing the number of employees being offered retirement programs via their employer and to slow the required distributions from such plans.  The order contains instructions for the Department of Labor and Treasury Department to consider various revisions to requirements related to qualified retirement plans and make legislative recommendations within 180 days.  More on that below.
  • Withdrawal of Funds for Home-Schooling/Student Loan Payments: Allowing 529 education accounts to be used to cover the cost of home-schooling, for fees related to a trade apprenticeship and to help pay off student debt.
  • Start-Up Innovation: Provisions of Tax Reform 2.0 contained in the American Innovation Act of 2018 focus on encouraging start-ups and corporate innovation. As an economic innovator, the U.S. has become less and less relevant every year.  In 2018, the U.S. slipped out of the top 10 in the annual Bloomberg Innovation Index for the first time.  South Korea, Sweden and Singapore lead the world in innovation.  The economies of these countries are thriving, due to their commitment to innovation.  The Innovation Index measures things like amount of research & development funding, number graduates in science and engineering, number of patents, and other items indicative of innovation.  Part of the problem is that U.S. start-ups face a hostile external environment categorized by overregulation and insufficient tax reductions for investments into developing proprietary technology.  Barriers to entry are also higher than they have ever been in the U.S.  Primarily due to these two factors, start-ups have a hard time reaching a point of profitability and getting a foothold.  Tax Reform 2.0 seeks to rectify these problems by providing expanded tax breaks for start-ups and increased deductions for research and development activities in particular.

Making the TCJA Permanent

Tax Reform 2.0 is set to introduce some of the new measures above, but it will also make the tax cuts permanent.  The Protecting Family and Small Business Tax Cuts Act of 2018 would permanently extend the temporary provisions of the Tax Cuts and Jobs Act.

The SALT Tax Conundrum

Representatives in Blue States are threatening to boycott Tax Reform 2.0 unless the SALT tax is changed, given the disproportionate effect on their states. 

“I will not vote for anything that makes the SALT cap permanent,” Representative Peter King of New York said in an interview Tuesday. “Others I have spoken to feel the same way. They are more against it now than they were last November and December.”

Representative Frank LoBiondo of New Jersey said he would only look at the tax cut 2.0 legislation “if they fix SALT.” We have the highest property taxes in the country in New Jersey.

Retirement Account Overhaul

Expanded retirement plan access is a priority for the Trump administration.  On August 31st, Trump issued an Executive Order calling for a simplification and overhaul of the various retirement planning vehicles available to small business owners.

The Order notes that regulatory burdens and complexity discourage small businesses from offering workplace retirement plans to their employees.  In 2017, less than 53% of small employers with fewer than 100 employees participated in tax deferred retirement plans as compared with 89% of companies with greater than 500 employees.  A survey by the Pew Charitable Trust concluded that 71% of small-and-medium sized businesses were deterred by the cost (which, of course, is a product of the complexity and administrative costs associated with such plans).

The Order calls for legislation that would encourage Multiple Employer Plans (“MEP”).  The sharing of administrative costs, regulatory compliance, and risk make this an attractive approach. 

On the other hand, playing devil’s advocate, the advent of “Servicers” in the mortgage-banking industry was heralded for providing the same benefits.  But, often an “insurance-based” model gives back in quality of administration, cost inefficiency, and fee creep (passed on to consumers) what it pays for in reduced administrative burdens and reduced oversight by rookie sponsors.  To the extent laws are overly complex, requiring “experts” to interpret and comply with them, to that same extent, cottage industries spring up that carry with them all manner of unintended consequences and externalities as the industry defends the necessity of its own service with a “black box” menu of services that are asymmetrical, lack transparency and fail to add value.

The Order calls for the Treasury to propose legislative changes within 180 days and announces that it “shall, therefore, be the policy of the Federal Government to address these problems and promote retirement security for America’s workers,” and that accordingly, the Secretary of Labor shall examine policies that would “clarify and expand the circumstances under which United States employers, especially small and mid-sized businesses, may sponsor or adopt a MEP as a workplace retirement option for their employees, subject to appropriate safeguards” and also look to “increase retirement security for part-time workers, sole proprietors, working owners, and other entrepreneurial workers with non-traditional employer-employee relationships by expanding their access to workplace retirement plans, including MEPs.”

Pending Legislation – Retirement Enhancement and Savings Act of 2018

It appears Brady plans to incorporate some provisions from the Retirement Enhancement and Savings Act (“RESA”/S. 2526), but it’s not clear to what extent.

That legislation was reintroduced in March by Senate Finance Committee Chairman Orrin Hatch (R-UT). A companion bill (H.R. 5282) introduced in the House March 14 by Rep. Mike Kelly (R-PA) currently has 64 cosponsors.

RESA has a start-up tax credit that makes it easier for small businesses to implement a retirement savings plan.

#TaxReform2.0, #UniversalSavingsAccount, #RetirementAccountReform, #RESA, #SALTTaxStandoff, #StartUpInnovation, #ToddlerCareDeductions

https://taxfoundation.org/tax-reform-2-0-framework-good-start/

https://www.cnbc.com/2018/09/07/this-tax-planning-strategy-would-get-a-boost-from-tax-reform-.html

https://www.cnbc.com/video/2018/09/07/rep-kevin-brady-on-tax-reform-2-point-0.html

https://www.bloomberg.com/news/articles/2018-09-05/ryan-says-tax-cut-2-0-vote-still-planned-despite-salt-hangups

https://waysandmeansforms.house.gov/uploadedfiles/tax_reform_2.0_house_gop_listening_session_framework_.pdf

https://www.bloomberg.com/news/articles/2018-01-22/south-korea-tops-global-innovation-ranking-again-as-u-s-falls

https://www.accountingtoday.com/news/tax-reform-20-legislation-planned-for-next-week-in-congress

https://www.voanews.com/a/house-republicans-seek-permanent-tax-cuts-as-elections-loom/4566314.html

https://www.accountingtoday.com/articles/house-gop-unveils-tax-cut-20-bill

https://www.dailysignal.com/2018/09/11/here-are-3-major-ways-tax-reform-2-0-would-help-americans/



Category: Tax Law


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