The legislation congressional Republicans finalized on Friday and are likely to enact next week delivers on many of the party’s—and President Trump’s— promises for a landmark overhaul of the tax code. But the rush to pass the bill through a narrow Senate majority and without Democratic support forced the GOP to sacrifice some of their long-held aspirations for tax reform.
The final bill permanently reduces the corporate tax rate all the way from 35 percent to 21 percent, nearly matching the 20 percent goal House Republicans set in their 2016 campaign plan (though not as low as the 15 percent Trump ran on). It cuts taxes sharply for business owners, and companies will be able to write off costly purchases of new equipment and buildings.
Individuals and families will benefit from a doubling of the standard deduction and the child tax credit. But Republicans were unable to simplify the tax code nearly as much as they wanted. Trump and House Speaker Paul Ryan had each called for collapsing the seven individual income-tax brackets down to three or four; the final compromise abandons that approach. And because Republicans refused to find enough revenue to offset the $1.5 trillion cost of their plan, they were unable to make most of the individual tax cuts permanent. The result will be changes that aren’t as lasting as they hoped or, if Congress extends them, will end up increasing the deficit by far more than the GOP projected.
Republicans had wanted to simplify the individual tax code so much that Americans could file their returns on a postcard. But because the GOP ended up retaining more deductions and exemptions than they’d planned to, that might be hard to accomplish. Republicans also failed to fully repeal the estate tax—a levy they’ve long derided as the “death tax.” But they did end up notching a win they didn’t expect: By eliminating the Affordable Care Act’s individual mandate in the tax bill, they’ve taken a step toward fulfilling the repeal promise they broke this year.
Here’s a rundown of where the key provisions ended up in the final tax bill:
Corporate tax rate
Trump wanted 15 percent, which was immediately deemed too ambitious even by the most aggressive tax cutters in Congress. The House and Senate bills each called for 20 percent, with the Senate delaying the change by a year. They settled on 21 percent, to begin immediately, which is still a huge reduction from the current 35 percent.
Individual tax rates
This was one area where Trump, Ryan, and House Republicans lost out on their long-held desire to collapse the current seven-bracket structure down to three or four brackets as part of simplifying the tax code. The Senate kept seven individual income rates, and that’s what prevailed in the final agreement.
Most people will see small reductions in the rate they pay. The bottom rate stays at 10 percent, rising to 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and finally 37 percent for income above $500,000 for individuals and $600,000 for couples. (The comparable current rates are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent.)
The biggest change was the last one Republicans made, in which they decided to reduce the top marginal rate to 37 percent from 39.6 percent—lower than either the House or Senate originally proposed. There’s a big catch to all of these rates, however: To get the plan under $1.5 trillion in cost, Republicans have set them all to expire at the end of 2025, meaning Congress will have to act before then to extend them.
This was the one constant in the Republican plans from start to finish: The standard deduction will nearly double, from $6,500 for individuals and $13,000 for families to $12,000 and $24,000, respectively. For many people, this will represent the biggest tax cut in the plan, and for some in high-tax states, it will offset the reduction in the state-and-local tax deduction.
The effect of doubling the standard deduction will be limited, however, by the elimination of the personal exemption. This change is the biggest example of simplifying the tax-filing process for individuals, since it will prompt more people to take the standard deduction rather than itemizing. Like the reduced tax rates, though, this provision also expires at the end of 2025.
For Republicans, the icing on the cake of the tax bill is its elimination of the penalty for people who go without health insurance—a step toward the party’s promise of repealing the Affordable Care Act. This scraps a key component of the law, though the GOP will face pressure to pass other bills that mitigate its impact on premiums. The Congressional Budget Office has said as many as 13 million fewer people would have coverage after a decade due to the repeal of the individual mandate. GOP leaders initially feared doing this in the tax bill would blow up the legislation, but they didn’t face as much opposition from rank-and-file members as they expected.
This change doesn’t take effect until 2019, so people will still be on the hook for the penalty next year.
Child tax credit
Republicans had always wanted to expand the current $1,000 child tax credit, but the provision got progressively more generous as the process went along. The new credit will be $2,000 per kid, with $1,400 of that refundable following a late push by Senator Marco Rubio of Florida. That will allow more people on the lower end of the income scale to benefit, but as the left-leaning Center on Budget and Policy Priorities points out, the change will still exclude the poorest families, preventing as many as 10 million children from taking full advantage.
State-and-local tax deduction
The proposed elimination of this tax break, known as SALT, was the biggest and most controversial pay-for in the Republican plan from the beginning. House members representing high-tax, largely Democratic states rebelled, and GOP leaders ultimately settled on a compromise: People will be able to deduct $10,000 in state and local property, sales, or income taxes off their federal bill. An earlier proposal would have limited the deduction to property taxes, but that was broadened in the final agreement.
Interest on mortgages up to $750,000 will be deductible under the new law, a change from the $1 million current cap. This was a compromise between the Senate and the House, which had called for lowering the cap to $500,000.
The so-called death tax lives—but it will apply only to the super wealthy as opposed to the only very wealthy. Republicans have long wanted to repeal the estate tax, which they argue is an unfair example of double taxation that hits family-run farms and businesses. But full repeal couldn’t get through the Senate, so they settled on lifting the exemption from the 40 percent tax to $11.2 million from $5.6 million per individual.
This was an early fight between House Republican leaders who wanted to allow businesses to write off the full cost of new buildings and equipment as a way to stimulate growth, and others in the conservative movement who prioritized lowering the corporate rate as much as possible. In the end, businesses get full and immediate expensing, but the provision will begin to phase out after five years.
People who itemize their taxes will actually see a more generous deduction for medical expenses than under current law, despite an initial House proposal to kill the break entirely. After a loud political backlash to the House plan, the deduction will kick in for expenses totaling 7.5 percent of income instead of 10 percent. This provision is aimed at people who have unusually large medical bills, and Senator Susan Collins of Maine in particular fought to expand rather than eliminate it. She has said that 8.8 million Americans use it, half with annual incomes under $50,000.
Higher-education tax breaks
Republicans abandoned plans to scrap the deduction for student-loan interest and a waiver for graduate-student tuition after howls of protest from the academic community. Both provisions are unchanged in the final bill.
Republicans had wanted to use the tax bill to eliminate a 1954 law restricting the political activities of churches and other nonprofits. But in a victory for Democrats, the Senate parliamentarian ruled that the provision violated the chamber’s budget rules because it didn’t involve taxes or spending, so Republicans took it out.