Senate Democrats are going to make the frenzied tax reform push difficult for Republicans, even if they aren’t in a position to block it.
Minority Leader Chuck Schumer and other Democrats sought to inflict maximum damage to House Republicans Tuesday for their reported consideration of limiting workers’ ability to direct pre-tax earnings to 401(k) retirement savings accounts, a move that would be meant to make the tax reform math add up on paper.
At the Capitol, the Democrats instead proposed to do the opposite, and allow greater pre-tax contributions to 401(k)s.
“Why would Republicans do this? Why would they hurt the middle class on something as sacred as retirement?” Schumer asked rhetorically. “To give a huge tax cut for the top 1 percent and to provide a tax giveaway to corporations.”
House Republicans are scheduled to unveil their tax reform legislation Wednesday, kicking off a scramble to pass a bill by the end of the year. As one way of paying for tax rate cuts, the GOP has eyed lowering limits on pre-tax earnings that can be added to 401(k)s. With 401(k)s, retirement savings are not taxed upfront, but are taxed when they are withdrawn in retirement.
Republicans in recent days have hinted they might instead steer workers toward Roth IRA-style accounts. With Roth accounts, contributions are made on a post-tax basis, but then are not taxed on withdrawal.
The net effect of that switch would be to raise more tax revenue for the government upfront, making the tax reform appear to raise more revenues over the 10-year time frame over which it will be judged.
Sen. Sheldon Whitehouse, D-R.I., called the idea a “sly budgetary trick.”
Sen. Ron Wyden, of Oregon, the ranking Democrat on the Finance Committee, also noted the switch would increase the complexity of retirement savings, as some savers would be forced to move some funds from 401(k)s to Roth-style accounts. It would be a “full employment program for record-keepers,” Wyden said.
Today, workers under age 50 are allowed to contribute up $18,500 to 401(k)s. Democrats propose to raise that cap to $24,500. They also call for offering tax credits to employers to match contributions.
That move would likely benefit high-earning individuals who are able to save significant amounts each year.
Democrats’ maneuvering is reminscent of a successful GOP gambit in 2015. Then, President Obama proposed eliminating 529 college savings plans as part of a reform of higher-education tax benefits. Republicans harshly criticized the proposal as a tax increase on middle-class families, and introduced bills to expand 529 plans. Amid the backlash, the Obama administration was forced to withdraw its suggested plan.
