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Before House Ways and Means Committee Chairman David Camp, R-Mich., could reveal on Wednesday his plan to overhaul the tax code, Senate Republicans nixed any chance of passage of tax reform this year.
Indeed, Senate Minority Leader Mitch McConnell, R-Ky., is quoted as saying Tuesday: “I don’t see how we can” advance tax reform this year.
Political strategists say Republicans are already taking issue with Camp’s plan, since it hikes taxes on the rich and banks, eliminates the lower tax rate on carried interest and would get rid of popular tax breaks.
Brian Graff, executive director of the American Society of Pension Professionals and Actuaries, said in an early Wednesday statement that at first blush he supported Camp's plan.“This proposal is a serious attempt at threading the needle – raising revenue in the budget window while substantially maintaining the incentive to set up and maintain an employer-based (retirement) plan.”
Graff said ASPPA believed Camp’s proposal “accomplishes a fine balance and is preferable to the disincentives to coverage and savings rates created by capping or eliminating existing limits.”
However, after further review, Graff released a statement Thursday stating his concern with Camp's double taxation of retirement plan contributions. "Chairman Camp’s tax reform proposal would subject all retirement plan contributions to the 10% surtax. The result is double taxation of these contributions -- totally ignoring the fact that these contributions are just tax–deferred, not a permanent exclusion, and will be subject to ordinary income tax when they are withdrawn after retirement."
Should this proposal become law, Graff said that a small business owner "could pay a 10% surtax on all contributions made to a qualified retirement plan today, then pay tax again at the full ordinary income tax rate when they retire." Penalizing small business owners for contributing to a plan, he continued, "is going to make them think twice about sponsoring a plan at all, and their employees could lose their workplace retirement plan. Double taxation is hardly what we hoped to see in any tax reform proposal."
Graff added that ASPPA is also "very concerned about the freeze" on contribution limits until 2023. "The cost of living in retirement is not going to be frozen. On top of the double taxation, this is a real blow to employer-sponsored retirement plans, and to American workers’ retirement security."
Camp said that his plan would not change how the tax code treats the money Americans have already saved. Going forward, it would maintain the 2014 contribution limits for individual retirement accounts and for defined contribution plans, like 401(k)s.
"Today, when saving for retirement, a taxpayer decides whether to put the money away for retirement after taxes and save tax-free (Roth accounts), or put the money away tax-free and then pay taxes when they withdraw the funds during retirement (traditional accounts)," Camp said.
For future contributions, Camp's plan allows up to $8,750 (half of the contribution limit) to be contributed either to a traditional or Roth account.
Robert Moore, president of Advisor and Institution Solutions for LPL Financial, and vice chairman of the Insured Retirement Institute, told ThinkAdvisor in a Wednesday interview from Capitol Hill that while he hadn’t seen all of the details of Camp’s plan, IRI and LPL are lobbying lawmakers to preserve the tax-deferred status of retirement plans. “Deferral is not avoidance; it’s creating a set of incentives for enhanced savings.”
This is just part of the message that he and other IRI executives were delivering Wednesday during their meeting with more than two dozen lawmakers.
Indeed, IRI President Cathy Weatherford noted that while Camp’s discussion draft “will certainly reignite the conversation on tax policy in America, it will be important for policymakers to recognize the overlap between tax policy and retirement security.”
In a Wall Street Journal op-ed Wednesday, Camp said he was releasing a plan to create “a simpler, fairer tax code.” The discussion draft states this will be achieved in three ways:
- Providing a significantly more generous standard deduction so that 95% of taxpayers will no longer be forced to itemize their individual tax deductions.
- Reducing the size of the federal income tax code by 25%.
- Tackling fraud, abuse and mismanagement at the IRS to protect hard-earned taxpayer dollars.
Camp's plan also reduces and collapses today’s brackets into two brackets of 10% and 25% for virtually all taxable income. More than 99% of taxpayers face maximum rates of 25% or less.
The plan would also impose a 10% surtax on certain types of earned income over roughly $450,000 a year, hitting salaried professionals but not the super-rich, whose income often is derived primarily from interest and investments.
Said Camp in the op-ed: “So many changes have been made to the tax code over the past decade that it is now 10 times the size of the Bible, but with none of the Good News.” While “that factual statement usually gets a good laugh back home in Michigan,” he continued, “what isn’t funny is the effect that constant tinkering with taxes has had on the people who pay them, and on the economy.”
Camp cited comments made by Nina Olsen, the National Taxpayer Advocate at the IRS, who has stated that Americans overall spend more than 6 billion hours and $168 billion every year to file their returns. “This is stark testimony to the complexity of the tax code,” Camp wrote. “Meanwhile, owners of small businesses face tax rates as high as 44.6%, while the total (state and federal) U.S. corporate rate, 39.1%, is the highest in the industrialized world.”
The Joint Committee on Taxation has already analyzed his plan, Camp said, and estimates that “after this streamlining of the tax code, the size of the economy will increase by $3.4 trillion over the next decade, or roughly 20% compared with today.” This will lead to nearly 2 million new jobs — and producing up to $700 billion in additional federal revenues that can be used to lower taxes even further or reduce the debt.
If tax reform doesn’t occur this year, Joe Lieber of Washington Analysis predicts that Camp’s blueprint will no doubt be used as “a template” for the next Chairman of the Ways and Means Committee, which Lieber said is “widely expected” to be Paul Ryan, R-Wis. “Of course, his proposal will differ from Camp’s, but many provisions will likely be similar,” Lieber said.
Also, while it’s unclear how the newly installed chairman of the Senate Finance Committee, Ron Wyden, D-Ore., will react to Camp’s proposal, “given that he is generally seen as being more liberal” than the previous chairman, Max Baucus, D-Mont., “Camp’s willingness to include a bank tax and a 10% surcharge on the upper income will surely be welcomed.”
Lieber goes on to note that House Republican leadership never wanted Camp to introduce a bill in an election year, “since they knew politically sensitive provisions (e.g. limits on mortgage deduction, muni bond interest deductions, state and local taxes) would be included.”
Indeed, Mike Nicholas, CEO of Bond Dealers of America, released a statement that BDA is concerned about several provisions of Camp's plan including the implementation of a 10% surtax on tax-exempt bond interest income and outright elimination of advance refundings and private activity bonds.
"BDA member are especially concerned about how this will impact the ability of state and local governments to finance critical public infrastructure projects like highways, hospitals, and water treatment facilities, by driving up borrowing costs and increasing state and local taxes," he said.
Steve Judge, president and CEO of the Private Equity Growth Capital Council, released a statement that he was “disappointed” with Camp’s decision “to single out private equity, real estate, and venture capital investment by exacting a 40% tax increase that will discourage new investment.” Last year, Judge said, “private equity invested over $400 billion in thousands of businesses of all shapes and sizes across all 435 congressional districts.”
Camp’s proposal “penalizes long-term capital investment, which he and other members of the House Ways and Means Committee have purported to support.”
Check out the discussion draft of Camp's tax plan.
Read Changes Afoot in Washington Well Ahead of Midterm Elections on ThinkAdvisor.