H.R. 1 As Economic Policy Part 2 Individual Income Tax Provisions

H.R. 1 is an omnibus bill running about 500 pages of bill text with scores of individual tweaks to the tax code. Some of them are good for the economy. Others are bad.

Part 2 of this series looks at the individual income tax provisions of the bill.

1. Increase in standard deduction (sec. 63 of the Code), repeal of the deduction for personal exemptions (sec. 151 of the Code), enhancement of child tax credit and new family credit ( sec. 24 of the Code) and repeal of overall limitation on itemized deductions (sec. 68 of the Code).

  

The amount of the standard deduction is temporarily increased to $24,000 for married individuals filing a joint return, $18,000 for head of household filers, and $12,000 for all other individuals. The amount of the standard deduction is indexed for inflation using the C-CPI-U for taxable years beginning after December 31, 2018. The additional standard deduction for the elderly and the blind is not changed by the provision. 

The bill suspends the deduction for personal exemptions. 

The  bill temporarily increases the child tax credit to $2,000 per qualifying child. The credit is further modified to temporarily provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children. The provision generally retains the present-law definition of dependent. The maximum amount refundable may not exceed $1,400 per qualifying child. It retains the present-law age limit for a qualifying child. Thus, a qualifying child is an individual who has not attained age 17 during the taxable year. The credit begins to phase out for taxpayers with adjusted gross income in excess of $400,000 (in the case of married taxpayers filing a joint return) and $200,000 (for all other taxpayers). These phaseout thresholds are not indexed for inflation.

The repeals bill the overall limitation on itemized deductions.

Realistically, while these are billed as temporary, these will probably be made permanent when they expire, increasing the deficit and the overall size of the tax cut overall from this bill.

The increase in the standard deduction, the repeal of personal exemptions, the increase in the child tax credit (some of which is refundable), and the creation of a credit for non-child dependents, is close to a wash, in terms of direct tax impact for many taxpayers. (Of course, to the extent that provisions have no impact on taxpayers and just reshuffle the deck in an equivalent way, they have little economic impact.)

The increased standard deduction is mostly offset for most taxpayers by the eliminated personal exemption. 

For non-itemizers (mostly working class and middle class renters), the offset is about two-thirds for childless people, about 100% for people with one child, and a net loss for  people with two or more children. But, the increased child tax credit offsets this for most non-itemizers with children under age 17, who get an overall modest tax cut. Tax cuts for these populations is generally good for the economy due to increased consumption effects.

The shuffle is also good for itemizers who just barely qualified to itemize their deductions, mostly homeowners in low cost of living areas. This disproportionately reduces their tax complexity, and the increased standard deduction and child tax credit and non-child dependent tax credits more than offset the tax pain for losing their itemized deductions.

This is good for the economy because it reduces the dead weight transaction costs for the economy as a whole associated with tax complexity, and removes the tax distortions on economic decision making (good, bad or indifferent) on these families. It also probably increase the already high levels of tax compliance for this group of people.

Itemizers who no longer itemize who took substantial itemized deductions before the standard deduction was increased, and itemizers who continue to itemize, especially homeowners in high cost of living areas like the Northeast, West Coast and a few central major cities (all Blue State country), come out worse off by losing the personal exemption and increased child tax credits and the new non-child dependent tax credit, will be a wash for some of these people and won't make up for the lost itemized deductions for others (particularly those with no children under age 17 or only one child under age 17).

There is a slight economic gain from a decline in tax complexity for people who can no longer itemize, but this dampens the construction industry in high costs of living places, and discourages people from migrating to places where productivity is higher, so overall its impact on this group of people is modestly bad for the economy 

This is a significant hit to upper middle class families with children in late high school (age 17 plus) or college because those children qualified for the personal exemption but not the child tax credit.  So, this combination of factors discourages higher education which is bad for the economy.

In general, the non-child dependent tax credit is an incomplete compensation for the loss of the personal exemption, so it also hurts people who have extended families such as low income elderly relatives in their households. A slight incentive for seniors to have their own homes may slightly boost the economy, but at the cost of increased social services costs, reduced efficiency and reduced family cohesion. But, this impact is so small and mixed that it probably has little net economic effect since it won't change much in terms of economic behavior.

For the upper middle class who don't have children in college, and the affluent, other provisions of the bill dwarf the impact of these tweaks, although the eliminating of the limit on itemized deductions (which was called the Pease Amendment named after a Congressman I interned for in college), reduces a tax complexity (that many people simply ignored for planning purposes) and helps this group materially.

The loss of itemized deductions for many people discourages home ownership and charitable giving. It also makes Red States more desirable relative to Blue States for relocating individuals.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows:

* Individual tax rate changes -1214.2
* Adjustment in inflation adjustment calculation 133.5
* Standard deduction change -720.4
* Personal exemption repeal 1211.5
* Child tax credit and dependent credit changes -543.6

Combined impact: -1133.2

Put another way, individual tax rate changes and the inflation adjustment impact on those tax rates account for almost all of the revenue impacts of these provisions. The standard deduction increase, personal exemption repeal, child tax credit tweaks, new dependent credit, and the impact of the inflation adjustment on those provisions combined is very small, basically a wash.

2. Modification of deduction for taxes not paid or accrued in a trade or business i.e. SALT (sec. 164 of the Code)

As a general matter, State, local, and foreign property taxes and State and local sales taxes are allowed as a deduction only when paid or accrued in carrying on a trade or business, or an activity described in section 212 (relating to expenses for the production of income). Thus, the provision allows only those deductions for State, local, and foreign property taxes, and sales taxes, that are presently deductible in computing income on an individual’s Schedule C, Schedule E, or Schedule F on such individual’s tax return. Thus, for instance, in the case of property taxes, an individual may deduct such items only if these taxes were imposed on business assets (such as residential rental property). Under the provision, in the case of an individual, State and local income, war profits, and excess profits taxes are not allowable as a deduction.

A taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for married taxpayer filing a separate return) for the aggregate of (i) State and local property taxes not paid or accrued in carrying on a trade or business, or an activity described in section 212, and (ii) State and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the taxable year. Foreign real property taxes may not be deducted under this exception.  Amounts paid in a taxable year beginning before January 1, 2018, with respect to a State or local income tax imposed for a taxable year beginning after December 31, 2017, shall be treated as paid on the last day of the taxable year for which such tax is so imposed for purposes of applying the provision limiting the dollar amount of the deduction. Thus, under the provision, an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future taxable year in order to avoid the dollar limitation applicable for taxable years beginning after 2017.

This provision is a serious hit to mostly itemizers who have high property tax bills or high income tax or sales tax bills which they deduct, mostly upper middle class homeowners in Blue States and very affluent taxpayers in most states. This interacts with the increased Standard Deduction to remove benefits of existing itemized deductions where the increased Standard Deduction didn't already eliminate them.

Mostly, this is a tax increase on the affluent which tends to be good for the economy.  

It encourages people in high housing cost areas, especially in the Northeast where property taxes area high, to spend less on an expensive house and to use their money for other purposes instead. This will reduce construction and lower the cost of high end housing, which is bad for the economy on balance.

This makes Red States more desirable relative to Blue States for relocating individuals, and encourages Blue States to restructure their tax systems to replace income and sales and residential property taxes with payroll and business income taxes and taxes on business property. Blue States that shift their tax burdens in this way will tend to have more regressive tax structures and to discourage business formation, which is economically bad, but these are probably second order effects relative to the tax increase on more affluent families.

It increases tax complexity slightly which is bad for the economy, but this is a third order effect swamped by more direct economic impacts.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows:

SALT Limitations plus 668.4 (includes limit on mortgage interest, casualty losses, miscellaneous deductions, charitable deduction adjustment, and end of itemized deduction cap).

3. Modification of deduction for home mortgage interest (sec. 163(h) of the Code)

The bill provides that a taxpayer may treat no more than $750,000 as acquisition indebtedness ($375,000 in the case of married taxpayers filing separately). In the case of acquisition indebtedness incurred before December 15, 2017, this limitation is $1,000,000 ($500,000 in the case of married taxpayers filing separately). Additionally, the bill suspends the deduction for interest on home equity indebtedness. 

The elimination of the mortgage interest deduction for home equity loans makes the economy more robust by discouraging debt and leverage in the economy unrelated to real estate. Families survive downturns better with less debt on their homes and also helped by having few interest expenses to finance consumer spending. But, the loss of home equity loan deductions also makes college more costly for middle class families who used this deductible debt to finance higher education for their children, and made it possible for families with unavoidable expenses, such as medical expenses, and investments in small businesses financed with home equity less available. So, this is something of an economic impact wash.

The denial of the mortgage interest deduction for mortgages interest on acquisition loans in excess of $750,000 rather than the $1,000,000 current limit, affects families with mortgage payments in excess of about $30,000 per year, on homes worth about $800,000 and up. This is almost entirely a hit to upper middle class families in Blue States like the Northeast, the West Coast and major urban centers elsewhere, since few other markets have homes expensive enough to justify such large mortgages.

This provision discourages affected families who have large mortgages already from relocating to new homes in high cost markets reducing labor mobility for highly skilled workers, discourages construction and purchases of more expensive homes dampening the construction market, and reduces high end home prices reducing upper middle class wealth. Self-employed families in this category offset the limitation from other tax cuts, but high income salaried workers often won't. But, this discourages excessive leverage and interest payments which makes the economy more robust.

Overall this is a slight drag on the economy.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: See 2. above.

4. Repeal of deduction for personal casualty and theft losses (sec. 165 of the Code)

The bill modifies the deduction for personal casualty and theft losses. Under the provision, a taxpayer may claim a personal casualty loss (subject to the limitations described above) only if such loss was attributable to a disaster declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act.

The mean-spirited provision raises little revenue but impacts people who suffer uninsured losses from casualties such as theft, fires and other mishaps. It taxes people who are economically worse off, quite possible impairing their ability to get back on their feet so as to become productive again economically.

It is bad for the economy and makes it less robust, even though it slightly reduces tax complexity for itemizers reducing the associated dead weight loss and even though it slightly increases the incentive to be insured (which when it happens makes the economy more robust) but since that incentive is very weak and requires high levels of information, it doesn't make much difference. Indeed, it is economically harmful by encouraging over-investment in casualty insurance and excessively small deductibles.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: See 2. above.

5. The increased deduction for medical expenses (sec. 213 of the Code)

Before the bill was enacted, individuals could claim an itemized deduction for unreimbursed medical expenses, but only to the extent that such expenses exceed 10 percent of adjusted gross income. The threshold was amended by the Patient Protection and Affordable Care Act (Pub. L. No. 111-118). For taxable years beginning before January 1, 2013, the threshold was 7.5 percent and 10 percent for alternative minimum tax (“AMT”) purposes. For taxable years beginning after December 31, 2016 and ending before January 1, 2019, the 10-percent threshold is reduced to 7.5 percent in the case of taxpayers who have attained the age of 65 before the close of the taxable year. In the case of married taxpayers, the 7.5 percent threshold applies if either spouse has obtained the age of 65 before the close of the taxable year. For these taxpayers, during these years, the threshold is 10 percent for AMT purposes.

The bill for taxable years beginning after December 31, 2016 and ending before January 1, 2019, the threshold for deducting medical expenses shall be 7.5-percent for all taxpayers. For these years, this threshold applies for purposes of the AMT in addition to the regular tax.

This provision slightly increases the itemized medical expense deduction for most people with catastrophic medical expenses who itemize. Since unreimbursed medical expenses are often involuntary, it will have little impact on medical decision making (although it may cause people to secure a few more elective medical procedures and devices) and will provide additional spending capacity to people who are hard hit by medical expenses.

This is a slight improvement to the economy and also slightly reduces tax complexity.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows:  -5.2

6. Repeal of deduction for moving expenses (sec. 217 of the Code)

The bill generally suspends the above the line deduction for moving expenses (even if employer paid), but retains the deduction for moving expenses and the rules providing for exclusions of amounts attributable to in-kind moving and storage expenses (and reimbursements or allowances for these expenses) for members of the Armed Forces (or their spouse or dependents) on active duty that move pursuant to a military order and incident to a permanent change of station.

This provision is bad for the economy. Insufficient labor mobility between low productivity and/or high unemployment areas to more productive areas with lower unemployment is a serious problem in the economy, and this repeal removes lubrication that addressed that problem with a very small tax revenue impact that mostly was relevant for the non-affluent.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: 12.4

7. Repeal of deduction for alimony payments and corresponding inclusion in gross income (secs. 61, 71, and 215 of the Code)

Prior to the bill, alimony and separate maintenance payments are deductible by the payor spouse and includible in income by the recipient spouse. Child support payments are not treated as alimony.

The bill treats all new alimony payments as child support effective for any divorce or separation instrument executed after December 31, 2018, or for any divorce or separation instrument executed on or before December 31, 2018, and modified after that date, if the modification expressly provides that the amendments made by this section apply to such modification.

This provision increases taxes for newly divorced middle class to affluent families where alimony payments are due (poor and working class divorced families don't have alimony awards or aren't affected much from a federal income tax perspective). The alimony deduction provided a strong incentive for people who owe alimony to pay it to get the deduction, so alimony payment compliance can be expect to fall especially among self-employed ex-husbands who aren't easily subject to garnishment.

It encourages divorce settlements to be arranged with property settlements that more disproportionately favor the poor spouse (usually the wife), and less alimony. But, that is only possible in asset rich families. Mostly, it increases aggregate tax burdens on divorcing families that are already financially stressed, reducing funds available to children and the size of alimony awards without a compensating benefit, and reducing investment in human capital such as children's educations.

This is bad for the economy, despite the slight tax simplification that it provides.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows:  6.9

8. Limitation on wagering losses (sec. 165 of the Code)

The bill clarifies the scope of “losses from wagering transactions” as that term is used in section 165(d). Under the provision, this term includes any deduction otherwise allowable under chapter 1 of the Code incurred in carrying on any wagering transaction. The provision is intended to clarify that the limitation on losses from wagering transactions applies not only to the actual costs of wagers incurred by an individual, but to other expenses incurred by the individual in connection with the conduct of that individual’s gambling activity. The provision clarifies, for instance, an individual’s otherwise deductible expenses in traveling to or from a casino are subject to the limitation under section 165(d).

This provision fixes an abuse of the tax code that encouraged economically wasteful activity and treated consumption as a business expense. It also slightly simplifies the tax code. It is an every so slightly beneficial to the economy provision.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows:  0.1

9. Modifications to the deduction for charitable contributions (sec. 170 of the Code)

The bill increases the income-based percentage limit described in section 170(b)(1)(A) for certain charitable contributions by an individual taxpayer of cash to public charities and certain other organizations from 50 percent to 60 percent.

The bill amends section 170(l) to provide that no charitable deduction shall be allowed for any amount described in paragraph 170(l)(2), generally, a payment to an institution of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event, as described in greater detail above.

The provision repeals the section 170(f)(8)(D) exception to the contemporaneous written acknowledgment requirement when the contribution is reported by the organization receiving the charitable gift. This provision is effective for contributions made in taxable years beginning after December 31, 2016.

Charitable deductions probably help the economy more than if they aren't made, but the abuse targeted clearly does not help the economy, and substantiation requirements reduce tax fraud, so on the whole this has a slightly positive economic impact.

The increased Standard Deduction and limits to other itemized deductions, however, means that charitable deductions will be much less common, especially for the less affluent.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows:

* See 2. above which includes percentage limit on charitable contributions.

* Athletic event exclusion 2.0
* Substantiation rule: Negligible impact

10. Modification of deduction for educator expenses (sec. 62 of the Code)

The bill increases the limit for the deduction of certain expenses of eligible educators, in determining adjusted gross income, to $500. Any deduction for expenses in excess of this amount (under present law generally a miscellaneous itemized deduction subject to the two-percent floor) is suspended.

This tiny tweak to allow $250 more of educator expenses is a nice hat tip to teachers and may increase investments in human capital as well, so it is good for the economy, but it is de minimus and is outweighed by the loss of itemized deductions for larger expenses.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: See 2. above.

11. Suspension of exclusion for qualified bicycle commuting reimbursement (secs. 132(f) of the Code)

The provision suspends the exclusion from gross income and wages for qualified bicycle commuting reimbursements. 

This exclusion was so tiny and rarely used that it has almost no economic impact, although encouraging bicycle community was good for the environment and some employers may continue to provide this despite the change in the tax law. It slightly simplifies the tax law which is a plus for the economy that offsets more or less equally any harm from the provision.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows:  Less than 0.05.

12. Repeal of Certain Miscellaneous Itemized Deductions Subject to the Two-Percent Floor (secs. 62, 67 and 212 of the Code)

Prior to the bill, individuals could claim itemized deductions for certain miscellaneous expenses. Certain of these expenses are not deductible unless, in aggregate, they exceed two percent of the taxpayer’s adjusted gross income (“AGI”). The deductions described below are subject to the aggregate two-percent floor.

Expenses for the production or collection of income

Individuals may deduct all ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income.

Present law and IRS guidance provide examples of items that may be deducted under this provision. This non-exhaustive list includes:

· Appraisal fees for a casualty loss or charitable contribution;

· Casualty and theft losses from property used in performing services as an employee;

· Clerical help and office rent in caring for investments;

· Depreciation on home computers used for investments;

· Excess deductions (including administrative expenses) allowed a beneficiary on termination of an estate or trust;

· Fees to collect interest and dividends;

· Hobby expenses, but generally not more than hobby income;

· Indirect miscellaneous deductions from pass-through entities;

· Investment fees and expenses;

· Loss on deposits in an insolvent or bankrupt financial institution;

· Loss on traditional IRAs or Roth IRAs, when all amounts have been distributed;

· Repayments of income;

· Safe deposit box rental fees, except for storing jewelry and other personal effects;

· Service charges on dividend reinvestment plans; and

· Trustee’s fees for an IRA, if separately billed and paid.

Tax preparation expenses

For regular income tax purposes, individuals are allowed an itemized deduction for expenses for the production of income. These expenses are defined as ordinary and necessary expenses paid or incurred in a taxable year: (1) for the production or collection of income; (2) for the management, conservation, or maintenance of property held for the production of income; or (3) in connection with the determination, collection, or refund of any tax.

Unreimbursed expenses attributable to the trade or business of being an employee In general, unreimbursed business expenses incurred by an employee are deductible, but only as an itemized deduction and only to the extent the expenses exceed two percent of adjusted

gross income. Present law and IRS guidance provide examples of items that may be deducted under this provision. This non-exhaustive list includes:

· Business bad debt of an employee;

· Business liability insurance premiums;

· Damages paid to a former employer for breach of an employment contract;

· Depreciation on a computer a taxpayer’s employer requires him to use in his work;

· Dues to a chamber of commerce if membership helps the taxpayer perform his job;

· Dues to professional societies;

· Educator expenses;229

· Home office or part of a taxpayer’s home used regularly and exclusively in the taxpayer’s work;

· Job search expenses in the taxpayer’s present occupation;

· Laboratory breakage fees;

· Legal fees related to the taxpayer’s job;

· Licenses and regulatory fees;

· Malpractice insurance premiums;

· Medical examinations required by an employer; 

· Occupational taxes;

· Passport fees for a business trip;

· Repayment of an income aid payment received under an employer’s plan;

· Research expenses of a college professor;

· Rural mail carriers’ vehicle expenses;

· Subscriptions to professional journals and trade magazines related to the taxpayer’s work;

· Tools and supplies used in the taxpayer’s work;

· Purchase of travel, transportation, meals, entertainment, gifts, and local lodging related to the taxpayer’s work;

· Union dues and expenses;

· Work clothes and uniforms if required and not suitable for everyday use; and

· Work-related education.

Other miscellaneous itemized deductions subject to the two-percent floor include:

· Repayments of income received under a claim of right (only subject to the two percent floor if less than $3,000);

· Repayments of Social Security benefits; and

· The share of deductible investment expenses from pass-through entities.

The billl suspends all miscellaneous itemized deductions that are subject to the two-percent floor under present law. 

Almost all of the expenses allowed under this provision are legitimate job related and investment related expenses, so there will be increased pressure on employers to reimburse them and for individuals to set up investment enterprises as entities or sole proprietorships. This increases tax complexity and compliance issues for people who do so.

Denying deductions is also an inappropriate taxation of income that taxpayers don't really have under a reasonable income concept.

On the other hand, it makes the tax returns and information gathering of people who are primarily wage and salary earners and forego the deductions significantly less complicated. Ultimately this mostly hurts middle and upper middle class wage earners and small time investors. By discouraging this low level investment and work expenditures, this is a modest drag on the economy.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: See 2. above.

13. Consolidation and modification of education savings rules (529 and 530 of the Code) .

The bill modifies section 529 plans to allow such plans to distribute not more than $10,000 in expenses for tuition incurred during the taxable year in connection with the enrollment or attendance of the designated beneficiary at a public, private or religious elementary or secondary school. This limitation applies on a per-student basis, rather than a per-account basis. Thus, under the provision, although an individual may be the designated beneficiary of multiple accounts, that individual may receive a maximum of $10,000 in distributions free of tax, regardless of whether the funds are distributed from multiple accounts. Any excess distributions received by the individual would be treated as a distribution subject to tax under the general rules of section 529.

The provision also modifies the definition of higher education expenses to include certain expenses incurred in connection with a home school. Those expenses are (1) curriculum and curricular materials; (2) books or other instructional materials; (3) online educational materials; (4) tuition for tutoring or educational classes outside of the home (but only if the tutor or instructor is not related to the student); (5) dual enrollment in an institution of higher education; and (6) educational therapies for students with disabilities.

This bill reduces investment income taxation on people who have substantial amounts to save by increasing the usefulness of 529 education savings plans by making them available for private K-12 education, who are overwhelmingly affluent.

While in theory, it benefits the middle class wanting to send children to private or parochial schools or home schools, and the affluent alike, and there is economic benefit to be had from the human capital investment of getting children out of failing schools and into private schools and home schools. In practice, those beneficiaries of the provision don't have enough funds available to make significant investment income taxation savings for working and middle class people with children in K-12 education. They are paying for tuition from income and scholarships and present family gifts. They don't have the money to pay for private school tuition (or the opportunity cost in terms of lost income in home schooling) and also to invest more in a 529 beyond what is needed for college.

So, the main benefit of this provision goes to affluent families who generally have good public schools to attend, but choose to send their children to private schools anyway, undermining public schools and providing tax breaks for people who don't need it and who aren't influenced in their schooling choice significantly because of it.

So, this provision is slightly bad for the economy, although realistically, it probably has a modest impact compared to other provision of the bill.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows:  -0.5

14. Reforms to discharge of certain student loan indebtedness (sec. 1203 of the House

bill, sec. 11031 of the Senate amendment, and sec. 108 of the Code)

  

The bill modifies the exclusion of student loan discharges from gross income, by including within the exclusion certain discharges on account of death or disability. Loans eligible for the exclusion under the provision are loans made by (1) the United States (or an instrumentality or agency thereof), (2) a State (or any political subdivision thereof), (3) certain tax-exempt public benefit corporations that control a State, county, or municipal hospital and whose employees have been deemed to be public employees under State law, (4) an educational organization that originally received the funds from which the loan was made from the United States, a State, or a tax-exempt public benefit corporation, or (5) private education loans (for this purpose, private education loan is defined in section 140(7) of the Consumer Protection Act). Under the provision, the discharge of a loan as described above is excluded from gross income if the discharge was pursuant to the death or total and permanent disability of the student. Although the provision makes specific reference to those provisions of the Higher Education Act of 1965 that discharge William D. Ford Federal Direct Loan Program loans, Federal Family Education Loan Program loans,and Federal Perkins Loan Program loans in the case of death and total and permanent disability, the provision also contains a catch-all exclusion in the case of a student loan discharged on account of the death or total and permanent disability of the student, in addition to those specific statutory references. 

This provision encourages high education and investment in human capital by making certain loan discharges on account of death or disability tax free. But, since this future tax break has virtually no impact on the decision of students to take out student loans and because most people who receive the break are insolvent and hence aren't taxed on the discharge of indebtedness anyway, this provision has very little economic impact. The beneficiaries of the death and disability break who get it are likely to spend rather than invest the money which is probably better for the economy, but the number of people impacted is too small for it to have any meaningful economic impact.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows:  -0.1

15. Rollovers between qualified tuition programs and qualified ABLE programs (secs. 529 and 529A of the Code) and temporarily allow increased contributions to ABLE accounts, and allow contributions to be eligible for saver’s credit (sec. 529A of the Code)

The provision temporarily increases the contribution limitation to ABLE accounts under certain circumstances. While the general overall limitation on contributions (the per-donee annual gift tax exclusion ($14,000 for 2017)) remains the same, the limitation is temporarily increased with respect to contributions made by the designated beneficiary of the ABLE account. Under the temporary provision, after the overall limitation on contributions is reached, an ABLE account’s designated beneficiary may contribute an additional amount, up to the lesser of (a) the Federal poverty line for a one-person household; or (b) the individual’s compensation for the taxable year.

Additionally, the provision temporarily allows a designated beneficiary of an ABLE account to claim the saver’s credit for contributions made to his or her ABLE account.

The provision allows for amounts from qualified tuition programs (also known as 529 accounts) to be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or a member of such designated beneficiary's family. Such rolled-over amounts count towards the overall limitation on amounts that can be contributed to an ABLE account within a taxable year. Any amount rolled over that is in excess of this limitation shall be includible in the gross income of the distributee in a manner provided by section 72.

This provision allows for increased contributions to accounts set up for people with special needs and allows parents to roll funds from college savings accounts that are investment income tax free to accounts for special needs kids who often weren't college bound.

The revenue impact of this provision is tiny because few kids with substantial funds set aside for college for them in 529 accountsend up needing special need funding instead and few have enough money to put in the accounts (except from personal injury settlements). It is a fair and compassionate rule, and probably modestly reduces social welfare spending on those children, although this investment in human capital may have a pretty modest future earning capacity impact.

Overall, this is probably a slight economic plus.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows:  Less than -0.05

16. Repeal of special rule permitting recharacterization of IRA contributions (sec. 408A of the Code)

The bill repeals the special rule that allows IRA contributions to one type of IRA (either traditional or Roth) to be recharacterized as a contribution to the other type of IRA. Thus, for example, under the provision, a conversion contribution establishing a Roth IRA during a taxable year can no longer be recharacterized as a contribution to a traditional IRA (thereby unwinding the conversion). The special rule that allows a contribution to one type of IRA to be recharacterized as a contribution to the other type of IRA does not apply to a conversion contribution to a Roth IRA. Thus, recharacterization cannot be used to unwind a Roth conversion. However, recharacterization is still permitted with respect to other contributions. For example, an individual may make a contribution for a year to a Roth IRA and, before the due date for the individual’s income tax return for that year, recharacterize it as a contribution to a traditional IRA.

This technical provision has no real economic effect and adds as much complexity as it removes.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: 0.5

17. Extended rollover period for the rollover of plan loan offset amounts in certain cases (sec. 402 of the Code)

Under the bill, the period during which a qualified plan loan offset amount may be contributed to an eligible retirement plan as a rollover contribution is extended from 60 days after the date of the offset to the due date (including extensions) for filing the Federal income tax return for the taxable year in which the plan loan offset occurs, that is, the taxable year in which the amount is treated as distributed from the plan. Under the provision, a qualified plan loan offset amount is a plan loan offset amount that is treated as distributed from a qualified retirement plan, a section 403(b) plan or a governmental section 457(b) plan solely by reason of the termination of the plan or the failure to meet the repayment terms of the loan because of the employee’s separation from service, whether due to layoff, cessation of business, termination of employment, or otherwise. As under present law, a loan offset amount under the provision is the amount by which an employee’s account balance under the plan is reduced to repay a loan from the plan. But, a qualified plan loan offset amount is a plan loan offset amount that is treated as distributed from a qualified retirement plan, a section 403(b) plan or a governmental section 457(b) plan solely by reason of the termination of the plan or the failure to meet the repayment terms of the loan because of the employee’s severance from employment.

This technical provision has little economic effect.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: Negligible revenue effect.

18. Modification of rules applicable to length of service award programs for bona fide public safety volunteers (sec. 457(e) of the Code)

The provision increases the aggregate amount of length of service awards that may accrue for a bona fide volunteer with respect to any year of service to $6,000 and adjusts that amount in $500 increments to reflect changes in cost-of-living for years after the first year the provision is effective. In addition, under the provision, if the plan is a defined benefit plan, the limit applies to the actuarial present value of the aggregate amount of length of service awards accruing with respect to any year of service. Actuarial present value is to be calculated using reasonable actuarial assumptions and methods, assuming payment will be made under the most valuable form of payment under the plan with payment commencing at the later of the earliest age at which unreduced benefits are payable under the plan or the participant’s age at the time of the calculation.

This provision slightly improves the economy by involving more volunteer retirees in the economy providing benefits the economic activity.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows: -0.5

19. Modifications to Estate, Gift, and Generation-Skipping Transfers Taxes (secs. 2001 and 2010 of the Code)

The provision doubles the estate and gift tax exemption for estates of decedents dying and gifts made after December 31, 2017, by increasing the basic exclusion amount provided in section 2010(c)(3) of the Code from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011. As a conforming amendment to section 2010(g) (regarding computation of estate tax), the provision provides that the Secretary shall prescribe regulations as may be necessary or appropriate to carry out the purposes of the section with respect to differences between the basic exclusion amount in effect: (1) at the time of the decedent’s death; and (2) at the time of any gifts made by the decedent.

This give away to rich heirs is bad for the economy and reduces charitable deductions as well. It discourages work by heirs and reduces the tax base for no offsetting benefit.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows:  - 83.0

20. Alternative Minimum Tax (secs. 53 and 55-59 of the Code)

The bill increases both the exemption amount and the exemption amount phaseout thresholds for the individual AMT. Under the provision, the AMT exemption amount is increased to $109,400 for married taxpayers filing a joint return (half this amount for married taxpayers filing a separate return), and $70,300 for all other taxpayers (other than estates and trusts). The phaseout thresholds are increased to $1,000,000 for married taxpayers filing a joint return, and $500,000 for all other taxpayers (other than estates and trusts). These amounts are indexed for inflation.

In the case of a corporation, the bill allows the AMT credit to offset the regular tax liability for any taxable year. In addition, the AMT credit is refundable for any taxable year beginning after 2017 and before 2022 in an amount equal to 50 percent (100 percent in the case of taxable years beginning in 2021) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability. Thus, the full amount of the minimum tax credit will be allowed in taxable years beginning before 2022.

This reduces tax complexity at the cost of a tax break for the upper middle class and the affluent. While the dead weight loss from the complexity is real, the harm from the tax cuts to the affluent probably outweigh the gains hurting the economy. 

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows:  -637.1

21. Elimination of Shared Responsibility Payment for Individuals Failing to Maintain Minimal Essential Coverage (sec. 5000A of the Code)

The provision reduces the amount of the individual responsibility payment, enacted as part of the Affordable Care Act, to zero. The provision is effective with respect to health coverage status for months beginning after December 31, 2018.

This hurts the Obamacare program in a way that significantly harms the soundness of the health insurance industry and the economic well being the country. This is very bad for the economy and has a large economic effect.

This raises federal revenue by reducing the number of people who obtain Obamacare coverage due to the mandate which reduces the subsidy expenses involved in the Obamacare program.

The estimated dollar impact of these provisions from 2018-2027 on federal revenues (in billions of U.S. dollars) is as follows:  314.1