Congressional Republicans released their proposal for tax reform on Nov. 2, and it included major provisions with implications for every American taxpayer. Changes to individual and corporate tax rates, the boosting of the standard deduction, and the elimination of many popular itemized deductions have garnered a lot of attention from policymakers. Yet by the time most people read about these provisions, there's a risk that they'll be out of date, because lawmakers are making further revisions to the proposal at breakneck speed in order to keep proponents onboard and boost the chance of eventual passage.
Not wasting any time
Lawmakers on Friday started to make revisions to the tax plan that they had introduced just a day before. Most of the changes were designed to make it easier for the bill to meet the requirements of the process that Republicans have chosen for passage. In order to pass the bill as part of a budget reconciliation that will avoid Senate rules that could lead to a Democratic filibuster, proponents of the bill have to make sure that the net cost of the proposed law changes is less than the authorized amount of $1.5 trillion.
As wrangling over certain aspects of the plan continues, the bill's proponents are looking for breathing room from a budgetary perspective. Some lawmakers would prefer less of a negative impact on the national debt, while others want to restore certain breaks that the original legislation would have eliminated. That requires coming up with potential offsets to cut the official cost of the proposal.
Lawmakers choose the chained CPI
The key move that the latest change to the bill made was to adopt the chained CPI method for calculating inflation-adjusted updates to tax provisions in future years. Currently, tax provisions like the dollar amounts for tax brackets, standard deductions, personal exemptions, maximum contributions for retirement plans, and income limitations for various tax breaks are adjusted every year to reflect overall price changes using the standard Consumer Price Index. The Trump tax plan had proposed using the chained CPI instead, with proponents arguing that it more accurately reflects actual costs that Americans pay. By doing so, estimates from one policymaking group show savings of about $81 billion over the next 10 years.
The primary rationale behind the chained CPI as an alternative to the current version of the index is to take into account a phenomenon called substitution bias. Currently, the Bureau of Labor Statistics establishes weightings for various goods that are generally fixed, reflecting the agency's data on consumption habits. However, some economists argue that when relative prices between close substitutes change, consumers shift their consumption toward the relatively cheaper good. For example, if a family likes chicken and pork equally well, and chicken prices rise, they'll eat less chicken and more pork than they did previously.
For lawmakers, the primary benefit of the chained CPI is that it typically results in lower inflation figures. The impact is relatively subtle, with the downward impact on inflation adjustments generally amounting to just a fraction of a percentage point each year. But over time, those slower gains add up to a big divergence from the regular CPI's trajectory. Some fear that if the chained CPI gets a foothold in the tax laws, it will naturally spread to other government programs, especially Social Security, which could result in slower benefit increases in future years.
Opponents of the chained CPI adoption argue that the move effectively reduces the long-term benefit to individual taxpayers. By slowing the rate at which tax brackets and deductions rise, chained CPI effectively imposes higher tax rates on a small but significant amount of income every year. Over time, estimates show that the move would reduce the proportion of the tax bill that benefits individuals by about a quarter.
Expect more changes
The process of legislation involves plenty of back-and-forth and compromise, and taxpayers can expect additional changes in the near future. Markups have already begun, and even if the House passes a version of the bill that's substantially similar to what was originally introduced, the Senate will then have an opportunity to decide whether to accept that bill in its current form or to suggest additional changes.
The net result for taxpayers is that there won't be any certainty on exactly what lawmakers are voting on until it actually comes to the floor of Congress for votes. That makes tax planning extremely difficult, and you'll need to be on your guard throughout the legislative process to stay up to date on what provisions actually make it into the bill.
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