All eyes will be on the Senate after the Thanksgiving break as the lawmakers will vote on—and likely pass—the Senate Finance Committee’s tax reform bill. The task “is prodigious and the timeline is fast,” says political watcher Andy Friedman in his latest white paper, released Nov. 20.

When Congress last reformed the tax code, “the legislative process took over two years. Now Congress is attempting the same feat in a little over one month,” Friedman of The Washington Update said.

As it stands now, the House has passed its version of the tax reform bill, with a Senate vote expected the week of Nov. 27.

Next steps? “Assuming Senate passage, a ‘conference committee’ comprised of leaders from the two bodies will iron out the many differences between the bills. The single bill that comes out of that committee will go back to the House and Senate again for passage,” then the final version will go to President Donald Trump for his signature.

(Related: 10 Most Tax-Friendly States for Retirees: 2017)

Friedman said he expects that Congress “will in fact pass the Tax Cuts and Jobs Act, although there might be changes to the bills as currently constituted to garner sufficient votes in the Senate,” with a final bill seeing passage by year-end. However, Friedman adds, it is possible the process will carry over into next year.

“Either way, the legislation’s effective date likely will be Jan. 1, 2018.” 

Freidman, a former tax attorney, offers the following is a chart (in billions) showing how much each of the major provisions of the Tax Cut and Jobs Act increases or decreases federal revenue. 

(The chart—rendered in billions of dollars—reflects the House bill, but the Senate bill numbers are not “meaningfully different,” Friedman notes.)

 

Individual

 

Business

 

 

Tax rate reduction

(1,089.4)

 

Rate reduction

(1,461.5)

 

 

Repeal AMT

(695.5)

 

25% pass through

(448.0)

 

 

Estate tax

(171.5)

 

International

285.4

 

 

Revenue raisers

1475.2

 

Revenue raisers

645.0

 

 

Total individual

(481.2)

 

Total business

(979.1)

 

 

Total revenue loss

 

(1,460.3)

 

 

 

Source:  Joint Committee on Taxation, Estimated Revenue Effects of H.R. 1 (November 2017).

 

                 

Businesses, Freidman says, “receive over two times the benefit that individuals get under the bill,” a balance that reflects the Trump administration’s “belief that permitting businesses to keep more of their funds will grow the economy, which ultimately will benefit individuals through greater employment and higher wages.”

Under the Senate reconciliation rules, the tax bill may lose no more than $1.5 trillion over the next 10 years, Friedman points out, and the bill comes in just under that amount at $1.46 trillion. 

Further, he says, the rate reduction on C corps from 35% to 20% costs $1,46 trillion, indicating that the corporate rate reduction uses the entire revenue loss allotment. “Accordingly, all of the other provisions in the bill must be revenue neutral in the aggregate: every dollar of revenue lost must be offset by a dollar of revenue gained.”

A taxpayer may end up paying “less tax, more tax, or the same tax depending on how the gainers and losers apply to his or her situation,” Friedman explains.

Investors, Friedman continues, may pay significantly less tax if they:

  • currently pay alternative minimum tax;
  • have large estates and are actuarially likely to die in the next few years; or
  • own a pass-through business other than a service business. Other investors may not fare so well; they should examine their situation carefully to see if the benefit of the reduction in tax rates exceeds the cost of eliminated deductions.

In addition to considering tax changes to individuals, Friedman exhibits in the following chart the sectors that are likely to incur “significant tax changes that could alter their stock valuations.”

 

Individual

 

Business

 

 


 


 

 

Winners

Losers

 

Winners

Losers

 

 


 

 

 

AMT Payers

High W-2 Earners

 

Retail

Technology/ Pharmaceutical

 

 


 

 

 

Large Estates

Large Mortgages High State Taxes

 

Capital Intensive    Businesses

Builders/Mortgage/  Real Estate

 

 


 

 

 

Non-Service  Pass-through

Personal Service  Pass- through

 

U.S.-Based Multi-   National Businesses

Insurance Companies

 

As to states taxes, most states use federal adjusted gross or taxable income as the starting point for imposing state tax, Friedman explains.

“States then reduce or increase the federal amount for particular state items. In those states, the expansion of the federal tax base arising from the elimination of deductions is likely to increase the state tax base as well – but without a corresponding reduction in the state tax rate. Thus, many investors may find that, although their federal tax is lower, their state tax has increased.”

(Related: 10 Most Tax-Friendly States for Retirees: 2017)