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Tax Reform’s Phase Two Should Make Middle Class Tax Cuts Permanent

Updated: Mar 24, 2023

By Ryan Ellis

There’s been a lot of talk lately about a “phase two” of tax reform to be considered later this year in the U.S. House of Representatives. There is no shortage of good, pro-growth ideas: death tax repeal, a capital gains tax cut, and permanent business expensing are three which immediately spring to mind.

Politically, however, it would make some sense to split these items up into several votes. In the lead-up to the Bush tax cuts in 2001, the House voted every year (separately) on tax cut items like killing the death tax and increasing IRA limits. No reason not to do that again.

As part of this communications-smart policy strategy, Congress ought to do a tax cut aimed squarely at the middle class. The proposal should do nothing more than make permanent the middle class tax cuts and reforms which phase out in the Tax Cuts and Jobs Act. Democrats claim that they want to extend tax relief to the middle class, so this is their chance to do it. So that no one can hide behind a concern over deficits, this package of permanent tax relief can be paid for by complementary and offsetting tax hikes in the new tax law also set to expire. Full credit here should be given to Scott Greenberg from the Tax Foundation, who gave me the idea for what you’ll see below.

The goal of this exercise, communications-wise, is to remind the middle class that it’s Congressional Republicans and the Trump Administration that cut their taxes, and that they want to keep those taxes low on a permanent basis. If the package becomes law, we’ll have sealed in place tax cuts for working Americans and made it easier to further limit itemized deduction-dependent industries like state/local governments and housing. If the package doesn’t become law, this is a heck of a talking point for tax cutters in the mid-term elections.

Call it the “Middle Class Tax Cut Act of 2018.” Below is a mix of five key elements. The ten year scores are my own, working off of the budget estimates provided at the time of the tax law’s passage. Since these items all expire after 2025, the revenue numbers are for the three remaining years of the FY 2019-2028 budget window. Beyond that, their respective sizes should grow sufficiently to pay for themselves on a permanent basis.

Doubling the standard deduction (est. score $330 billion). The tax law doubled the standard deduction to $24,000 for a married couple, $18,000 for a single parent, and $12,000 for a single person. As a result, the number of married couples itemizing their deductions will decline from 44 percent under the old law to 16 percent under the new law, a nearly two-thirds reduction. Unmarried taxpayers’ propensity to itemize will decline to near statistical irrelevance. Besides being a middle class tax cut, this is an extremely important development for future tax reforms.

Doubling the child tax credit and requiring Social Security numbers (est. score $230 billion). The tax law doubled the child tax credit from $1000 to $2000 and made it available to more families than today. It also created a $500 tax credit for older child dependents and non-child dependents. In order to benefit from the child tax credit, Social Security numbers of children must be provided as an anti-fraud, anti-illegal immigration protection.

Permanently “repealing” the AMT (est. score $300 billion). The tax law all but eliminates the alternative minimum tax (AMT) in tax years through 2025, a relief to the 5 million families that have been paying it and the millions more who had to calculate it. The AMT “standard deduction” is now so high that almost no one will pay the AMT anymore. Keeping the all-but-repealed AMT as deadwood on a permanent basis will do a lot of good in suburban districts for those running on tax relief. It also removes a source of complexity in the tax code which has been a hindrance to tax reform.

So that’s the tax relief. How to pay for it? Two tax reforms were put in place as part of the tax law, but they are also scheduled to expire. They should be made permanent.

Repealing the personal and dependent exemptions (est score $550 billion). The old exemptions for tax filers and dependents are no longer needed. The personal exemption taken by tax filers and their spouses is rolled into the doubled standard deduction. The dependent exemption is more than made up for with the doubled child tax credit. This also eliminates the need for a personal exemption phaseout (“PEP”).

Keeping the itemized deduction limits in place permanently (est. score $340 billion). There were two major limitations put in place for those relatively few families that still choose to itemize their deductions instead of take the standard deduction. First, the overall deduction for state and local taxes (SALT) is limited to $10,000. Second, the overall indebtedness limit on new mortgages is capped at $750,000 (and home equity loan interest unrelated to acquisition indebtedness isn’t deductible at all). There’s also an increase in the amount that can be deducted as charitable contributions in any given year. Most other itemized deductions are eliminated. The high income phaseout of itemized deductions (“Pease”) is also eliminated.

Put these five policies together, and you have a very close to revenue neutral package. This mixture of middle class items not only should be popular politically, but it also cements in place a tax code in which relatively few families are attached to big ticket tax write-offs for mortgage interest, state taxes, and charitable gifts. That alone should be worth the price of admission for serious tax reformers.

Learn more here.

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