‘Rothification’ of 401(k)s Likely in Senate Tax Plan

Tax and budget analysts are giving mixed reviews of the House bill, which is being amended

Rep. Kevin Brady, R-Texas, has amended the tax bill. (Photo: AP) Rep. Kevin Brady, R-Texas, has amended the tax bill. (Photo: AP)

House lawmakers are amending their recently released tax bill and senators are considering their own version — said to include “Rothification” of 401(k)s — even as tax analysts are still scoring the House's plan.

Tax and budget analysts’ views of the House bill, The Tax Cuts and Jobs Act, are a mixed bag, with the Tax Foundation on Monday finding in a state-by-state impact breakdown that the bill would “significantly lower marginal tax rates and the cost of capital, which would lead to 3.6% higher GDP over the long term [and] 3.1% higher wages.”

But analysis performed on the bill by the Committee for a Responsible Federal Budget provides a dire outlook, stating that as a result of the bill, “trillion-dollar deficits would return by 2020 and debt would exceed the size of the economy in just over a decade.”

Citing analysis by the Joint Committee on Taxation, the Committee states that the House GOP tax plan would increase deficits by $1.487 trillion over 10 years. “Those deficits would lead to higher debt, resulting in $270 billion in additional interest costs. As a result, the legislation would add $1.75 trillion to the national debt by 2027.”

Meanwhile, the House Ways and Means Committee started marking up the bill Monday afternoon, with amendments to the bill put forth by Chairman Kevin Brady, R-Texas, regarding carried interest and startup companies.

Senate Bill

After wrangling and resistance by President Donald Trump, the House GOP plan did not include changes to 401(k) plans, but Senate Democrats were up in arms on Tuesday over the Senate tax plan including "Rothification" of the savings vehicles. 

Sen. Patrick Leahy, D-Vt., led a group of Senate Democrats Tuesday in calling on leaders of the Senate Finance Committee to reject changes to the tax system that would harm existing tax incentives for Americans to save for retirement. 

Senate Republicans plan to release their own version of tax reform legislation later this week.

According to the Senate Democrats' letter, Senate Republicans may be considering making changes to retirement savings incentives, specifically by adopting so-called “Rothification,” which would eliminate or limit the amount of pretax money that can be contributed to 401(k) accounts. 

Leahy and other Senate Democrats highlight research showing that workers at all income levels participating in employer-sponsored retirement plans contribute on average at least $2,700 annually to their accounts. "This amount exceeds the $2,400 limit that Republicans reportedly have considered setting as a new pretax limit for retirement account contributions," the letter states. 

“Congress needs to do more to improve retirement incentives for the American people, not less," Leahy said. "Dramatically altering incentives for retirement simply to raise short-term revenue to pay for tax cuts for the wealthy is a cynical ploy that will harm hardworking Americans in every state.”

Brady's Amendment

Brady said that his amendment includes a provision to ensure that “employees of startup companies can also share in the success of the business they are helping to build by better aligning the recognition of stock-based compensation for tax purposes.”

Another provision within the amendment imposes “an additional holding period requirement of three years with respect to gains on a 'carried interest' in an investment or real estate business” in order to claim the carried-interest tax rate, which is lower than the tax rate on ordinary income.

The Bill's Outlook

The House plan may pass “later this week,” opined Greg Valliere, chief global strategist for Horizon Investments, in his Monday commentary, “with numerous provisions that the Senate will almost certainly reject in December.”

Dissent is already brewing “over the state and local tax, killing the adoption tax credit, abolishing the tax deduction for steep individual medical expenses, and curbing the mortgage tax break, which doesn't have much support in the Senate,” Valliere said. “Restoring those tax breaks will require raising more revenues; we're still not convinced the top corporate tax will fall all the way to 20% in 2018.”

Job and Wage Growth

As for the Tax Foundation’s analysis, it uses the think tank’s Taxes and Growth (TAG) macroeconomic tax model, a dynamic model that makes economic assumptions about the effects of tax changes on hiring and wages.

The TAG model estimates that the plan would result in the creation of roughly 975,000 new full-time equivalent jobs, while increasing after-tax incomes by 4.4% in the long run.

“The increase in family incomes is the result of both the income tax cuts and the broader rise in productivity and wages due to economic growth,” the Tax Foundation said. The estimates accounts for all aspects of the Tax Cuts and Jobs Act, including changes to the individual and corporate tax codes.

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