Republicans have cleared another key hurdle in their dash to pass a tax bill before Christmas. On Wednesday, negotiators from the House and Senate reached an agreement on how to reconcile their competing bills.
From the beginning, there was broad consensus on the big pieces: a substantial, permanent cut to the corporate tax rate remains the heart of this bill, flanked by temporary tax cuts for individuals, some limited relief for middle-class families, and a potentially destabilizing end to the requirement that all Americans buy health insurance.
Now, House and Senate negotiators have agreed on how best to pay for these changes — while also managing to introduce some entirely new, last-minute provisions, like a surprise cut in the top tax rate for individuals. Here’s what you need to know.
Many beloved tax breaks will stay
Gone is the House’s original, wide-ranging effort to eliminate a spread of popular tax breaks, like the deductions for medical expenses, interest on student debt, and graduate student tuition waivers. All these will remain in place.
Instead, the final bill focuses on narrowing two core deductions. First, the mortgage interest deduction will be capped at $750,000, down from the current cap of $1 million.
Second, the ability to deduct state and local taxes from your federal tax bill. The final provision is notably different from the House and Senate versions, which limited the deduction for property taxes while abolishing the ability to deduct state income tax payments.
Instead, the final rule will apparently allow taxpayers to claim up to $10,000 in a combination of state income taxes and local property taxes.
Remaining tax breaks still useless for many
Perhaps the most important takeaway, however, when it comes to individual tax breaks, is that they are going to be a lot less useful for middle- and upper-middle-class families.
That’s because the Republican plan also doubles what’s called the standard deduction — a fixed-dollar amount that everyone gets to shield from federal taxes. And you can’t take both. Either you use the standard deduction, or you itemize in order to claim individual deductions for things like charitable giving or state and local taxes.
So when the standard deduction gets bigger, as it would under the Republican bill, itemizing will inevitably become more rare. Likely much more rare.
Here in Massachusetts, the number of people expected to continue itemizing will drop from roughly 37 percent of filers to more like 13 percent, according to the Institute on Taxation and Economic Policy. So even if the latest changes sound good to you, you may not ever get to use them.
High earners may get even more
Most Americans — and most Massachusetts residents —
As if to emphasize the point, House and Senate negotiators decided at the last minute to reduce the top tax rate for individuals from the current 39.6 percent to 37 percent.
That’s a bigger change than was contemplated by either the House or the Senate, and would help high-income residents in blue states like Massachusetts offset the losses they’ll experience with the narrowing of the deduction for state and local taxes.
There are still some critical unknowns
Most of what we know about this bill comes from leaks, with the full text still under wraps. And some of the details remain rather vague.
Senator Mike Lee has said that the child-tax credit, which stands at $2,000 in the Senate bill, may yet be expanded further. One way to make this happen would be to extend this credit to working families who don’t earn enough to pay income tax but who do contribute payroll taxes.
Also unclear is whether this bill will do anything to placate the concerns of Maine Senator Susan Collins, a crucial Republican vote who has requested a package of additional changes designed to stabilize health care markets.
The cost question won’t go away
Look over this list and you’ll note that most of these last-minute changes cost money. Lowering the tax rate for high-earning individuals, further expanding the child tax credit, allowing some deductions for local income taxes — they all reduce tax receipts for the government.
But that can’t happen. The Senate bill was already as expensive as allowed under Senate rules. Somehow, these costs have to be offset.
There is one clear revenue-raising change. Rather than cutting the corporate tax rate from 35 percent to 20 percent, the latest version leaves its at 21 percent.
However, that may not be sufficient. Which means there are likely some other as-yet-unknown tax increases in this latest bill. When the full text is made public in the coming days, we’ll find out what they are — and how big an effect they might have in Massachusetts.Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the U.S. He can be reached at firstname.lastname@example.org. Follow him on Twitter @GlobeHorowitz