Thoughts on Tax Reform

Nov 13, 2017

As you know, Thursday November 2, the House Ways and Means Committee released its first draft of legislation that would seek to “reform” the tax code. With respect to the estate tax, the draft proposes to double the exemption beginning on January 1, 2018, and then repeal the estate tax at the beginning of the eighth year. It also provides for a full step up in basis following repeal.

What is the legislative path forward? We thought it might be helpful to offer a few observations:

  1. This is the first draft from the Ways and Means Committee, the tax writing committee in the House. The next step is for the chair of the Ways and Means Committee to take comments and tweak the draft before presenting the next draft (the so-called “Chairman’s Mark”) to the actual Ways and Means Committee for comment, amendment, and ultimately a vote. When the proposed bill passes the Ways and Means Committee, likely somewhat changed from the current draft, it will go to the floor of the House for discussion, amendment, and vote. Given the political dynamics of the House, this will all occur fairly quickly, over the next two weeks.
  2. We expected (and predicted in our last email) that the draft that would come yesterday and ultimately be passed by the full House would call for full repeal of the estate tax as of January 1, 2018. So, in a sense, this is a lower opening bid than anticipated.
  3. The Senate, normally a more moderate voice, will walk through a similar process. Many individual Republican senators have expressed the view that “we got it right” with current law. Especially given the factors discussed below, we expect significant moderation from the House proposal.
  4. Although the draft introduced yesterday purports to create additional deficit over 10 years of just under $1.5T, additional deficits are also created outside of the 10 year reconciliation window. Because reconciliation provisions do not allow for additional deficits to be created outside of the reconciliation period, this means that the Senate will have to rework much of this draft, even if passed by the full Ways and Means Committee and the House pretty much “as is,” to comply. In such a rework, the following points bear watching:
    • The draft’s estate tax repeal proposal results in a revenue loss of $171B. This is very significant, about 25% of all benefits directly for individual taxpayers in the draft. Obviously, the political optics are not good — this amount could pay for a lot of tax cuts or other, more politically palpable items.
    • Essentially, the new corporate and personal tax provisions (including repeal of the estate tax) will have to sunset (or the base further broadened, which means cutting bone not flesh) to avoid creating post-reconciliation period (year 11 and forward) deficits.
    • Senator Rubio and two other senators are insisting that any tax legislation ensure that the child care tax credit be doubled to help middle class families, and he has made an impassioned speech on the Senate floor to make this point. The cost of this provision is approximately $300B, and it is not included in the current draft legislation.
    • Polling is horrible for doubling the current lifetime exemption, one very credible poll showing 68% against, 18% for. We have an extremely middle class oriented electorate, and the political cost of forgetting that will be on each senator’s mind.
    • Many groups are already making comparisons that appear to signal the death of the GOP majorities if this version is close to what is enacted. For example – the heirs of every couple with an estate worth $22M or more would see a $4.4M tax cut from a doubled exemption amount. That individual couple’s savings would be enough to pay for 1,100 Pell Grants for low and moderate income students. Time will tell how much traction this kind of information will gain.

In any event, assuming a sunset of repeal after year 10, current law would reappear in year 11 unless we should have another GOP straight flush in Washington to continue repeal with new legislation. Obviously, that is unlikely.Our desire is for good policy that provides a stable planning environment for our clients, and we advocate accordingly. And, we believe that planning under current law is still, by far, the wisest course for clients. Should you have any questions whatsoever, please feel free to contact us.