With the economy humming and larger deficits looming, it may not seem like the best time to push for additional tax reforms. But the “Tax Reform 2.0” legislation is about keeping the discussion going and recognizing there are still ways to improve the tax code without harming the budget.
The Tax Cuts and Job Act, or TCJA, cut taxes and simplified the filing process for most people. But many of these changes are temporary and scheduled to expire at the end of 2025. The first priority of Congress should be to provide certainty to individual taxpayers on whether they will get to keep their tax cuts and fix parts of the code the TCJA left untouched.
The House Ways and Means Committee’s “Tax Reform 2.0” legislative package helps move in that direction. Some have already written off the bill’s chances of getting very far. But an analysis of the economic benefits that would come with finishing what the TCJA started shows this series of three bills deserves serious consideration.
The first bill would make the individual provisions of the TCJA permanent. The Tax Foundation’s Taxes and Growth model estimates this would grow the U.S. economy by 2.2 percent, raise wages by 0.9 percent, and create 1.5 million full-time equivalent jobs when the economic effects are fully realized. This, of course, would come at a cost, reducing federal revenue on an annual basis by $166 billion. But there are still a number of inefficient deductions in the tax code, which policymakers could modify or eliminate to help finance permanence.
The other bills in the package would make improvements to two parts of the tax code left untouched by the TCJA: the tax treatment of retirement savings and start-up businesses.
Currently, the tax treatment of retirement savings is riddled with restrictions, limitations, and rules that differ across more than a dozen types of retirement accounts. The second bill would make several important changes to this current system of savings, including the creation of universal savings accounts. These would be a significant improvement over today’s long-term savings options, especially for those who may not have access to retirement savings through their employer.
The third bill would improve how the tax code treats start-ups by allowing businesses to deduct their start-up costs. The current tax code acts as a barrier to entrepreneurship, and it’s certainly important for lawmakers to make this a priority for the next round of tax changes.
That being said, there are some major reform priorities that are not in the framework. In pushing for Tax Reform 2.0, House Ways and Means Chairman Rep. Kevin Brady, R-Texas, has argued Congress should not “go back to the old ways of doing [tax reform] every 30 years.” To that end, this new series of bills is a positive first step, but Congress should do even more to improve the tax code.
On the business side, a key piece of the TCJA allows companies to immediately deduct the cost of their capital purchases on machinery and equipment. This change does away with complicated depreciation schedules for these investments and removes the tax code’s bias against certain investments, making the U.S. a more enticing place to do business. Like the individual income tax provisions of the TCJA, the expensing law will expire. We estimated last year that if this change were permanent, it would have done even more for job creation and wages than the corporate income tax rate reduction.
Lawmakers ought to prioritize making the expensing provision permanent well before it begins phasing out in 2023. This would prevent a scheduled tax hike on business investment and give businesses more confidence to invest. Businesses make investment decisions years in advance; by acting as early as possible, Congress would help them plan and direct capital into the U.S economy. And in the long run, permanence for the TCJA expensing provision would provide about 4.5 times more GDP growth per dollar of revenue cost than making the individual TCJA provisions permanent.
Too often, Congress jumps from crisis to crisis. But here, Congress should not wait for the last minute and act now instead. When it comes to reforming the federal tax code, there is still more work to do. Waiting until 2022 or 2025 is not a viable solution. Nor is waiting to improve other areas of the tax code that remain prime targets for reform. There is no good reason why another three decades should pass before the political timing is right for Tax Reform 2.0.
Erica York is an analyst, and Nicole Kaeding is the director of federal projects at the Tax Foundation in Washington, D.C.
