Recently, a document was released by the Trump administration that contained yet another broad description of its “tax plan”. Because estate tax repeal is included the document, this could cause clients to ask whether they should engage in tax oriented planning, or, alternatively “wait and see”. In light of that type of confusion, we wanted to provide a little context to the released document.
First, the document that will come out today is little more than the same thing we’ve seen repeatedly. Its only real significance is that this document, along with the death of the Graham-Cassidy Bill (“Obamacare repeal bill”), signals that the time for real tax reform/reduction discussion has begun. Most of the power players in the Trump administration who are involved in tax discussions are, in fact, not in favor of repeal. The reason it is included in this document is simply that the Administration did not want to take a position contrary to the House right out of the gate, and the House wouldn’t back off this point.
Second, with that background, and based on many conversations with members of Congress, here are just a few facts that will give you a sense of the massive climb to ever achieve estate tax repeal:
- Senator Bob Corker (a deficit hawk) and Senator Pat Toomey (Club for Growth) agreed to allow the budget bill to have a $1.5 trillion deficit. Senator Corker is a Senate Budget Committee member, and could block the budget bill. This provides him the leverage to set the guardrails for the entire discussion.
- Why? The budget bill is the vehicle for a reconciliation-based (51 vote) tax bill. This means that if the Trump-proposed tax cuts add to the deficit by more than $1.5 trillion, they have to be paid for by “base broadeners”. Today’s Trump summary doesn’t discuss any of the base broadners. It’s a “Disney World Dad” document – all the fun with none of the responsibility.
- The $1.5 Trillion is really less than that, because from the $1.5 Trillion you have to deduct the estimated cost of tax breaks that are automatically being extended (the “extenders” in common parlance), which burns about $500 – $600 Billion. So, the real number that can currently be spent with tax cuts is $900 Billion to $1 Trillion. Roughly, that amount only gets you to a corporate rate that’s barely below 30%, not nearly enough to have impact on the U.S. standing in the developed world tax rate list.
- Senator Toomey and his allies think that “dynamic scoring” will pick up a lot more room for cuts (i.e., expand the original $1.5 Trillion), but Senator Corker is very skeptical of exaggerated dynamic scoring, and will only allow certain entities that are reasonable in their scoring to be counted in determining how to use the $1.5 Trillion, not the much more aggressive supply side groups. As a result, the $1.5 Trillion won’t pick up much through dynamic scoring.
- So, where’s the big money to pay for big corporate rate reductions, much less all the individual rate reductions, estate tax repeal, alternative minimum tax repeal, and other goodies? That has to come from “expanding the base”, or what are referred to as “base broadeners”.
- Here’s the problem, though — the big base broadeners are gone: border adjustment ($1 Trillion pickup), Obamacare taxes repeal ($1 Trillion pickup), deny business interest deduction ($1 Trillion pickup), denial of personal mortgage interest deduction, denial of charitable contributions – are all gone, not going to happen, up in smoke. They won’t be touched, so won’t “pay for” anything. What’s left are the nickels and dimes: denial of state and local taxes deduction, the “Rothification” of 401ks, etc. And even those small potatoes all have big lobbies ready to fight for survival.
- Trump also wants to cut individual rates and have rough rate parity between C corps and S corps, both expensive propositions. So, you can add those two items to the “spend list” going against the $1 Trillion net of extenders deficit agreed to by Senators Corker and Toomey.
- Understanding all of the above, consider that the cost of estate tax repeal is estimated to be close to $300 Billion, or almost 1/3 of the $1 Trillion “spend” that the Senate can agree to make without picking up a lot more money from the base broadeners listed above – the nickels and dimes. Plus, spending money on estate tax repeal isn’t “dynamic”, i.e., it doesn’t create money like supply siders argue income tax reductions accomplish.
- As a result, we do not see the road that can lead to estate tax repeal. There’s not nearly enough money.
- And, consider that this is only the financial side of the issue. The political or “optics” side of estate tax repeal is worse, e.g., it’s not a middle class tax cut plan, the benefits to Trump family and his cabinet are massive, the electorate is extremely populist, etc.
All of the above considered, we believe it is a serious mistake for clients to cease or delay planning to “wait and see” as to estate tax repeal. There are really no dynamics that would argue that repeal will occur other than the simplistic point that “it’s been GOP orthodoxy since Reagan.” The GOP senators with whom we have discussed the issue repeatedly believe that current law is reasonable and appropriate. Thus, “orthodoxy” is really not much to go on compared to the realities of the moment.