On May 12, the House Ways and Means Committee released its recommended tax provisions to be included in the budget reconciliation bill that Congress is considering. These provisions are politically charged, and consequently, are controversial.
The bill was 389 pages long as of that release. This was a first draft of provisions that are likely to be rewritten several times before the reconciliation bill becomes law. From a tax professional’s perspective, many of the provisions add complexity to the Internal Revenue Code.
The Joint Committee on Taxation estimates that, between 2025 and 2034, the Ways and Means proposal would result in tax cuts of $7.7 trillion, which are partially offset by tax increases of $3.9 trillion for a net cost of $3.8 trillion. Many of these costs are front-loaded as these provisions would increase the deficit by about $1.2 trillion in 2026 and 2027. Many believe increased deficits of this magnitude will give bond markets indigestion, which could affect the final version of the bill.
While Democrats claim these provisions are tantamount to providing tax cuts to billionaires, that may be an overstatement. However, it is fair to say that the majority of the tax cuts are business-related. For example, it will become possible to write off substantially all of the costs of constructing a factory in the year it opens for business. The bill also rolls back several business tax provisions in the Tax Cuts & Jobs Act that were enacted to offset the corporate tax cuts. This was needed because small businesses are adversely affected by those provisions.
The bill contains numerous provisions that offset the tax cuts, including scaling back or eliminating several clean energy tax provisions enacted in the Inflation Reduction Act. In addition, many of the revenue-raising limitations that were set to expire on Dec. 31, 2025, were made permanent. Some of those notable revenue raisers include limiting home mortgage interest deductions, casualty losses and various other itemized deductions.
While a complete analysis of the proposals is beyond the scope of this column, there are several provisions that may be of interest to Signal readers, including:
• Increasing the standard deduction through 2028, with an additional increase for senior citizens.
• Increasing the child care credit through 2028.
• The estate and gift tax exclusion will be increased to $15 million.
• Interest on debt incurred to purchase certain vehicles assembled in America will be deductible.
Many of these tax reductions phase out at various income levels. Taxpayers whose income is in the phase-out range may find it cumbersome to calculate the amount of their deduction.
One of the biggest issues affecting the outcome of this legislation is the state and local tax deduction. The 2017 Tax Cuts and Jobs Act limited this deduction to $10,000 for most taxpayers. In 2017, the JCT estimated that this provision would raise about $100 billion annually. However, there was a loophole allowing the owners of pass-through businesses to have their business pay the tax in order to retain the deduction.
The Ways and Means Committee proposal would increase the limitation to $30,000 for taxpayers having modified taxable income no greater than $400,000. The $30,000 limitation would be scaled back for most taxpayers with income between $400,000 and $500,000. Taxpayers with income of at least $500,000 would face the current $10,000 limitation. More importantly, the pass-through business loophole would be eliminated.
The SALT deduction is the biggest sticking point impeding the passage of this bill. In the 2018 midterm elections, some Congressional Republican incumbents in blue states were voted out of office due to anger over the SALT deduction limits. In 2024, many Republicans in those districts were elected because they campaigned on repealing, or at least scaling back, the SALT deduction limitation. The number of those Republicans exceeds the Republican majority in the House, and several have openly said the proposed $30,000 cap is a “non-starter” for them. It’s possible that the final version of this bill will contain a somewhat higher cap.
It is important to remember that Ways and Means is one of several House Committees working on the reconciliation bill. Other committees will introduce spending proposals for consideration by the entire House. After that, the bill goes to the Senate. In 2017, the Senate rewrote much of the Tax Cuts and Jobs Act and many final provisions were effectively written by the Conference Committee.
I expect a repeat of that process this year which will undoubtedly result in hastily drafted, confusing legislation that will be challenging to implement.
Jim de Bree is a semi-retired CPA who resides in Valencia.
