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Tax Reform Talk Heats Up Inside the Beltway

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As talk heats up in Washington, D.C. on the items that are part of President Donald Trump’s agenda, there appears to be interest in taking action this year in reforming the tax code. The tax writing committees in the House and Senate have held numerous hearings on the issue in recent years and have a good idea of the trade-offs involved with tax reform. The goal—at the moment—is to reduce overall tax rates and in return reduce or eliminate some popular credits and deductions.

Steven Mnuchin, President Trump’s pick to lead the Treasury Department, has suggested lowering the cap on the mortgage interest deduction but still allowing for some deductibility. Recently, Mnuchin said, “Taxes are way too complicated and people spend way too much time worrying about ways to get them lower.”

House and Senate Republicans are on board with tax reform. Rep. Kevin Brady (R-TX), Chairman of the House Committee on Ways and Means, which is the tax writing committee in the lower chamber, has said that tax reform is something that happens only once in a generation. An overhaul of the tax code last took place in 1986, which has led to speculation that perhaps the time for tax reform has arrived.

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The sentiment among the Administration and Congress is to address individual and corporate tax reform at the same time. Lawmakers could look to bring overseas profits back to the U.S. as a way of paying lowering rates and reducing the budget deficit. According to the Joint Committee on Taxation (JCT), U.S. based multinational corporations have approximately $2.6 trillion in profits offshore to avoid paying corporate income taxes.

NLBMDA is engaged on the future of the mortgage interest deduction. The popular tax deduction has been part of the tax code since its inception in 1913 and is the cornerstone of American housing policy. Homeowners may deduct interest from up to $1 million of acquisition mortgage debt and up to $100,000 of home equity loan debt. These amounts were set in 1987 and have not been adjusted for inflation.

The deduction is a middle-class tax break and is particularly beneficial to younger households and larger families. Nearly two-thirds of the benefits of the mortgage interest deduction are claimed by those earning less than $200,000.

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Yet these same taxpayers pay only 43% of all income taxes, meaning these deductions make the tax code more progressive and fair.

If the mortgage interest deduction is reduced or eliminated, after-tax housing costs would increase, and demand for housing would decrease. In turn, reduced demand would depress home prices, producing a sizable loss for existing home owners. Such a change in home values could weaken the economy and perhaps even drive the nation’s economy back into recession.

Another tax issue of interest to many lumber dealers, the estate tax, is on the radar of the Trump Administration. As a candidate, President Trump proposed eliminating the estate tax while also eliminating “step-up” basis. Property now held by a decedent is stepped up, which allows all appreciation before death to escape capital gains tax. The elimination of step-up basis would have consequences for owners of family businesses looking to pass them on to the next generation.

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Concerning the timing and procedure of tax reform, congressional Republicans are likely to use budget reconciliation as a way of moving the legislation. That would allow the Senate to bypass certain procedural hurdles and allow a simple majority to approve a tax overhaul package. The downside to using reconciliation is that any tax cuts would have to lapse within 10 years to comply with the Byrd Rule, a Senate rule that prohibits budget reconciliation provisions increasing the deficit beyond 10 years.

NLBMDA remains steadfast in its support of the mortgage interest deduction and opposes efforts that would eliminate or substantially modify it. Moreover, the association supports full repeal of the estate tax, and is opposed to efforts such as eliminating step-up basis that would have severe negative effects in succession planning for family-owned businesses.

Dealers are encouraged to come to the nation’s capital to discuss tax reform and other legislative issues affecting the lumber and building material industry with their lawmakers at the 2017 NLBMDA Spring Meeting and Legislative Conference, March 27 through March 29, 2017 in Washington, D.C. Learn more by visiting www.dealer.org.

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