In the wake of the GOP’s victories in last month’s midterm elections, Republican lawmakers are newly empowered to work on overhauling the nation’s byzantine tax system.
Their decisions could have significant implications for taxpayers, who altogether spend 6 billion hours complying with the tax code at a cost of $168 billion, according to the Internal Revenue Service.
Paul Ryan of Wisconsin, the de facto policy director of the Republican Party, will become the chairman of the House Ways and Means Committee, which has jurisdiction over tax matters, and is planning broad tax reform.
With control of the Senate flipping, Utah Sen. Orrin Hatch will be chairman the Senate Finance Committee. He too, is a proponent of revising the tax code.
However, they will be held in check by President Obama, who doesn’t share their priorities for tax policy and could veto their plans. Nevertheless, in the 114th Congress Republicans will advance some narrowly targeted bills they think can become law and set the stage for their next moves.
Here’s what their plans mean for you:
1. Cheaper medical devices
Incoming Senate Majority Leader Mitch McConnell and top Republicans have been clear: They want the Medical Device Tax to go.
The Medical Device Tax was included in Obamacare to pay for its expansion of health care coverage. Medical supply manufacturers benefited from the added business from the law, but they want to get rid of the tax. It imposes a 2.3 percent sales tax on all kinds of medical devices, including everything from CT scanners to replacement joints and even to hypodermic needles.
The tax is estimated to bring in $29 billion over 10 years, according to the Joint Committee on Taxation. Most of that hit would be passed on to consumers in the form of higher prices, according to the Congressional Research Service, even though most medical devices covered by the tax are sold to providers rather than to consumers.
Although Obama would not be likely to sign a law repealing the tax, it has broad support, possibly enough to reach a veto-proof majority in the Senate. Thirty Senate Democrats voted to repeal it in a symbolic vote in 2013. Repeal has support from liberal Democrats from blue states with medical device manufacturers, such as Massachusetts’ Elizabeth Warren and Minnesota’s Al Franken.
2. Lower rates
If there’s one thing that post-George H.W. Bush Republicans stand for, it’s lower tax rates.
Ryan’s goal, as stated in his past budgets, is to reduce tax rates for individuals and businesses to 25 percent. Currently, those rates are 39.6 percent and 35 percent, respectively.
Outgoing Ways and Means Chairman Dave Camp of Michigan proposed lowering rates in his reform draft plan released in the spring. To prevent his plan from adding to the deficit, Camp included a 10 percent “surtax” on households making more than $450,000 a year.
Lower rates mean that you will keep more of each additional dollar you earn. But in the context of tax reform, most households would lose large credits and deductions to pay for those rate reductions. In Camp’s plans, most families would have seen their tax bills stay the same.
3. More expensive mortgages
One of the tax preferences likely to be on the chopping block when Republicans move to lower rates is the deduction for mortgage interest payments.
The mortgage interest deduction is one of the biggest and most claimed tax breaks in the code, accounting for $93 billion in foregone revenues in 2013, according to the JCT. Although it’s also one of the most popular breaks, would-be tax reformers likely would have to face the prospect of limiting it.
Under current law, mortgage interest payments can be deducted only for loans up to $1 million. Camp’s plan called for gradually reducing that cap for new loans to $500,000 over four years. His plan effectively would have raised the cost of buying expensive homes for high-earning taxpayers.
4. Higher tax bills, if you live in a blue state
The likeliest losers in a GOP reform effort would be higher earners in high-tax, high-spending blue states.
People in those states claim the greatest deductions of state and local taxes. Those deductions are highly likely to be in GOP crosshairs during a tax-reform effort.
Taxpayers deducted $56 billion in state and local tax payments in 2013, according to the JCT. Two-thirds of the benefit of the breaks accrue to households earning more than $200,000 a year, and 90 percent of the value went to those making more than $100,000. They are heavily concentrated in blue states, with California and New York alone accounting for 30 percent of the breaks’ value, as estimated by the nonprofit Tax Policy Center.
That’s money that could be used for rate reductions, coming from a group of taxpayers that is not traditionally a favored Republican constituency.
5. Bigger breaks for having more kids
If Sens. Mike Lee of Utah and Marco Rubio of Florida have their way, families would see serious tax savings for having more kids.
The two reform-minded senators have proposed boosting the Child Tax Credit from $1,000 to $2,500, applicable to both income and payroll taxes. In Lee’s original version of the plan, the credit would cover children through the age of 16, making it worth up to $40,000 per child.
It’s an idea that has support among some Republicans looking to make a stronger pitch to working families, rather than just to high earners and businesses.
But to pay for it, the senators proposed keeping the top individual and corporate income tax rates at 35 percent, a tough sell to Republicans.
That would conflict with the priorities of Ryan, who has said that rate reductions are priority and has called them the “secret sauce” of economic growth.
To help poorer families, Ryan would favor boosting a different credit: The Earned Income Tax Credit, which supplements the earnings of low-income families.
This year, Ryan announced an initial plan for expanding the EITC for childless workers, one that mirrored a measure proposed by President Obama, as part of his ongoing efforts to articulate a new anti-poverty agenda.
But exactly how poor and working families would be treated in a broad tax reform scenario remains to be seen. The Camp reform plan left the distribution of taxes roughly the same, according to the JCT, but would have affected different families in different ways. The left-of-center Center for Budget and Policy Priorities, for instance, found that the Camp plan ultimately would have raised the taxes of a mother with two children who worked full time at the minimum wage by about $2,000 a year.
6. Simpler tax returns
“Americans should be able to do their taxes on 2 sheets of paper,” House Speaker John Boehner tweeted in October.
Republicans want to shorten the tax code and simplify its provisions, reducing the need for regular people to worry about whether they understand their own tax returns.
Camp boasted that his plan, for instance, would ease “complexity and compliance burdens” and repeal “over 220 sections of the tax code, cutting the size of the income tax code by 25 percent.”
The conservative Heritage Foundation said that Camp’s plan makes “filing taxes easier for many lower- and some middle-income taxpayers” because it would reduce the number who needed to itemize deductions.
By eliminating a number of breaks, loopholes and preferences, the Tax Policy Center found, Camp’s plan would have simplified tax filing and lowered the need for strategic tax planning.
The average American taxpayer spends 13 hours managing and filing his taxes, according to the Internal Revenue Service.
