We reported in our July article, “A Fall Classic—Election Year Political and Policy Perspectives From Inside the Beltway,” that the House Ways and Means Committee, (the House of Representatives’ tax writing committee) is considering Tax Reform 2.0. Tax Reform 1.0 refers to the new tax reform law, “Tax Cuts and Jobs Act of 2017.” Tax Reform 2.0 is an attempt to give House Republicans something to offer voters on the campaign trail in October as they eye a political wave approaching in November that is likely to oust them from power.

Tax Reform 2.0 comprises three bills:

1. “Protecting Family and Small Business Tax Cuts Act of 2018”
2. “Family Savings Act of 2018”
3. “American Innovation Act of 2018”

Parsing and packaging Tax Reform 2.0 into three bills is a political maneuver which allows a handful of vulnerable Republicans to split their vote among the three bills. The core proposal in the “Protecting Family and Small Business Tax Cuts Act of 2018” would make the individual tax rate reductions, including the special tax deduction on qualifying pass-through entities (partnerships, S corporations, sole proprietorships, and limited liability companies), permanent. The individual tax cut provisions in the “Tax Cuts and Jobs Act of 2017” expire at the end of 2025.

The House Ways and Means Committee passed Tax Reform 2.0 (the three bills) by party-line vote. House Republicans from states impacted by the limits on the deduction of state and local property taxes (known as “SALT”) pleaded with House Republican leaders to drop the provision in the “Protecting Family and Small Business Tax Cuts Act of 2018.” Republican members from high cost states would rather not remind voters on the eve of the mid-term election that their party favors making this controversial tax increase permanent. Despite stiff opposition, the SALT provision remained in the bill.

Tax Reform 2.0 would add over $600 billion to the deficit, according to government economists, if approved by Congress. As of this writing, House leaders plan to bring Tax Reform 2.0 to the House floor before the election. It is expected to pass the House by party-line vote.

In addition to making the individual tax cuts permanent, the Tax Reform 2.0 package includes several other provisions aimed at promoting small business and reducing taxes on saving and investing:

• Increases the deduction for business start-up and organizational costs.
• Creates a new tax-free savings account for investors called a “Universal Savings Account.” This proposal would allow tax-free savings accounts up to $2,500 per year for all individuals including dependents with at least $2,500 of earned income.
• Permits tax-favored withdrawals from 529 college savings plans for apprenticeship fees, cost of home schooling, and paying student loan debt.
• Permits penalty-free withdrawals from retirement plan accounts for the birth or adoption of a child and new rules allowing repayment of those withdrawals to the retirement account.
• Creates a new pooled retirement plan option where employers can band together to adopt a central 401(k) plan and share plan administration and other expenses.  
• Exempts small retirement account holders (with retirement savings of $50,000 or less) from required minimum distributions (RMDs) beginning at age 70 ½.
• Allows traditional IRA contributions after age 70 ½. Current law prohibits traditional IRA contributions once an individual attains age 70 ½, the date taxpayers must begin retirement distribution.
• Expands retirement savings opportunities for military reservists.

As you can see, Tax Reform 2.0 includes a number of attractive provisions for small business owners and investors. Unfortunately, with the exception of a handful of provisions related to retirement savings in the “Family Savings Act of 2018,” the bulk of the tax proposals in the other bills will not pass the Senate this year. Senate leaders say they cannot muster the 60 votes needed to pass the legislation. However, action on these bills signals Republican tax priorities in the new Congress, which starts in January 2019.

The Senate Committee on Finance passed a handful of retirement savings proposals a couple of years ago that are very similar to the provisions in the Family Savings Act of 2018. This gives the bill a better chance of passage during a lame duck session. Of course, whether Congress holds a lame duck session depends on the outcome of the election. A divided Congress post-election historically drives an active lame duck session.

Stay tuned, the election is right around the corner. We will report after the election on the progress of lame duck legislation.

Boston Private is pleased to announce a partnership with Doug Fisher, a Washington Policy expert, who will offer a series of insights into a number of reform proposals making their way through Congress in 2017.  Doug is Director of Retirement Policy at the American Retirement Association.  In this role, Doug works with the ARA membership to protect, advise and grow their businesses through ideation and advocacy in the benefits area.  Before joining ARA, Doug led Fidelity's legislative policy and thought leadership development teams involving retirement, health and welfare benefit plans. Doug has advised many Fortune 1,000 companies on the impact of legislation and regulation on the design and delivery of benefits. Before joining Fidelity, Doug served as tax counsel to the U.S. Senate Finance Committee and was involved in writing the pension, health and insurance provisions of the Small Business Job Protection Act of 1996; the Balanced Budget Act of 1997, including the Roth IRA, Simple retirement plan, medical savings account (predecessor to the health savings account); and the Health Insurance Portability and Accountability Act of 1996 (HIPAA). ​