As President-elect Donald Trump prepares to take office, there is increasing focus on his proposed tax cuts and legislative priorities.
Trump's tax reforms include no tax on tipped income, adjustments to overtime pay, and various deductions for first responders, military personnel, and Americans living abroad.
However, the feasibility of these tax cuts depends on finding ways to offset their costs, as highlighted by House Ways and Means Committee Chairman Jason Smith.
Smith emphasizes the need for careful financial planning to avoid worsening the federal deficit when implementing any new tax cuts that are not part of the existing policy baseline.
Smith has been working closely with multiple tax committees to draft legislation that extends the tax cuts established in 2017 and addresses broader tax code issues.
His frequent discussions with Trump indicate a close working relationship as they navigate the complexities of tax policy.
Despite Trump's desire to lower the corporate tax rate to as low as 15%, Smith remains skeptical and suggests that the rate is likely to stay at 21%.
This aligns with the views of many tax experts who believe that the current rate is already competitive globally.
One pressing issue for small businesses is the upcoming expiration of the tax provisions under section 199A of the tax code, which is set to lapse at the end of 2025.
Smith points out that this provision is utilized by 99% of small businesses, and its expiration could lead to a significant increase in the average tax rate for these entities, jumping from the current rates in the 20% range to 43.4%.
Smith advocates for making section 199A permanent, emphasizing its critical role in supporting the economy and the financial health of small businesses.
Apart from small business concerns, Smith notes that 70% of the expiring tax provisions affect individual taxpayers.
Failure by Congress to act could result in a tax increase for every American due to changes in deductions, child tax credits, and individual tax rates.
The discussion also includes the SALT (State and Local Tax) deduction, which was capped at $10,000 in the 2017 tax law.
While a complete reversal of this cap is considered too costly, Smith is exploring a compromise that could satisfy lawmakers from high-tax states like New York, New Jersey, and California.
In the pursuit of funding new tax cuts, Smith suggests that tariffs could serve as a potential revenue source.
However, he acknowledges the risks associated with relying on tariffs, given their inconsistent nature and the historical challenges of directly linking them to tax policy.
This approach would also require Trump to give up some control over tariff policy to Congress, which could complicate the administration's ability to use tariffs as a negotiating tool.
The complexity of crafting a comprehensive tax bill is further complicated by the narrow margins in Congress.
Smith anticipates a slim GOP majority in the House, which means securing the necessary votes will require a delicate balancing act.
He prefers a single, expansive reconciliation bill that encompasses a range of Trump's priorities, including energy, immigration, and tax cuts.
This strategy differs from suggestions by Senate leadership to divide these priorities into multiple bills, which Smith believes could lead to legislative failure.
The financial implications of Trump's proposed tax cuts are significant, with the estimated cost of extending the 2017 tax cuts alone being $4.6 trillion.
Smith argues that existing tax policies should not be seen as new expenditures requiring offsets.
This reflects a broader philosophical debate within Congress regarding tax policy and budgetary constraints.
He believes that the extension of current tax policies should be treated as having a baseline cost of zero, and he hopes this perspective will be reflected in forthcoming legislation.
Despite the challenges, Smith remains optimistic about the potential for revenue generation.
He cites recent fiscal year data that showed $900 billion more in revenue than initially projected.
He attributes this success to the corporate tax rate remaining at 21%, which has not hindered revenue growth.
However, he warns that the real issue lies in spending, which has increased to 26% of GDP over the past four years, well above the long-term average of 20%.
Smith's focus on spending control highlights the need for a balanced approach to fiscal policy as the new administration seeks to implement its tax agenda.