White House unveils dramatic plan to overhaul tax code in major test for Trump

WASHINGTON – President Donald Trump on Wednesday proposed a dramatic overhaul of the tax code, calling for sharply lower rates for individuals and businesses but also eliminating key tax breaks.

The proposal is a one-page outline – key details are left incomplete – but it presents an initial offer to begin negotiations with lawmakers, as White House officials believe reworking the tax code is one of their biggest priorities to boost economic growth.

"We have a once in a generation opportunity to do something big and important on taxes," White House National Economic Council Director Gary Cohn said Wednesday.

White House officials are ambitious, but the path to overhauling the tax code is riddled with political landmines. Many budget experts believe the White House's plan would reduce federal revenues by so much that it would grow the debt by trillions of dollars in the next decade, growing interest costs and slowing the economy.

And Trump's advisers are looking to axe some tax breaks that are very popular in certain states, including the deduction Americans take for the state and local taxes they pay separately each year. Eliminating this deduction could save more than $1 trillion over 10 years, but inflame lawmakers and governors in states that have high income tax rates.

The central feature of the White House's plan would be a big reduction in tax rates for virtually all Americans and businesses.

It would eliminate the seven existing income tax brackets and replace them with three brackets, containing new rates of 10 percent, 25 percent, and 35 percent, based on someone's income. White House officials haven't specified which income levels would hit the higher tax brackets, as they see that as part of ongoing discussions with Capitol Hill.

It would also roughly double the standard deduction that Americans can use to reduce their taxable income. The deduction for married couples would move from $12,600 to $24,000. This would incentivize people not to itemize their tax returns and instead use the standard deduction, simplifying the process and potentially saving taxpayers thousands of dollars each year.

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The White House plan would eliminate the alternative-minimum tax and the estate tax, provisions that raise billions of dollars each year but have long been the target of Republicans seeking to rip up the tax code. Cohn, speaking of the AMT, said "we don't think that people should have to do their taxes twice," and added that the estate tax unfairly prevented farmers and others from passing along their businesses to the next generation.

In order to offset some of the cost of the lower rates, Trump administration officials said they were proposing to eliminate virtually all tax deductions that Americans claim, provisions that they argued primarily benefited wealthier Americans. Cohn said they would preserve tax breaks that incentivize home ownership, retirement savings, and charitable giving. But almost all others would be jettisoned.

This includes the tax deduction people can claim for the state and local taxes they pay each calendar year. These taxes can be particularly high in states with higher income taxes, such as California and New York.

"It's not the federal government's job to be subsidizing the states," Treasury Secretary Steven Mnuchin told reporters at the briefing with Cohn. "It's the state's independent decision as to do what they want to tax."

Some of the White House's tax changes would benefit the wealthy, such as the elimination of the estate tax, while other changes would benefit the middle class and lower-income Americans.

For businesses, Trump's proposal would lower the corporate tax rate from 35 percent to 15 percent, and it would also allow smaller businesses, structured in such a way that they are affected by the individual tax rate, to also use the 15 percent threshold. There are millions of these businesses, known as "S Corporations," and they are often small, family-owned firms.

But they can also include large law firms and lobbying shops. Mnuchin said special protections would be put in place to ensure that the 15 percent rate isn't taken advantage of by the wealthiest earners, though he didn't say how the White House would do this.

The White House is also proposing a one-time tax "holiday" to incentivize companies to bring several trillion dollars currently being held in other countries back into the United States. They didn't specify what that tax rate would be, saying its currently part of negotiations on Capitol Hill, but they believed providing this incentive would bring money back for investment and hiring.

"We expect that trillions of dollars will come back on shore and will be reinvested here in the United States, for capital goods and job creation," Mnuchin said.

This process is called "repatriation." It's controversial, because critics allege the money is brought back and then paid out in dividends to shareholders, not used for hiring. But Democrats and Republicans have both been open to the idea of a tax holiday. The Obama administration proposed using one to bring money back into the United States that could be used for new infrastructure projects, for example.

A key part of Trump's tax plan during the campaign was to levy a tax or tariff against companies that move overseas and then try to sell their products back to American consumers. Cohn and Mnuchin said they were still looking at alternatives on how to structure this idea, and it was not an element of the plan rolled out on Wednesday. They said they found a plan embraced by House Republican leaders – known as a border adjustment tax – to be unworkable in its current form, but they are going to work with key lawmakers to see if adjustments can be made, Mnuchin said.

He also said White House officials were hopeful that their plan could win support from Democrats, but he said they were willing to forge ahead without them if necessary. They could use a special budget process known as reconciliation to pass the changes through the Senate with a simple majority vote, though this would be very difficult given how sharp they are planning to cut taxes. Mnuchin also said their goal was to make permanent changes to the tax code, but they would consider a shorter-term change if necessary to win political support.

"This is what's important to get the American economy going," Mnuchin said. "So I hope [Democrats] don't stand in the way. And I hope we see many Democrats who cross the aisle and support this. Having said that, if they don't, we are prepared to look at the reconciliation process."

The White House's proposal bypassed a plan from House Republicans, led by Speaker Paul D. Ryan, R-Wis., that would have offset broad reduction in rates with a change in the way imports and exports are taxed, a proposal known as a "border adjustment tax."

Ahead of the announcement, some Democrats were skeptical. Senate Minority Leader Charles E. Schumer, D-N.Y., said members of his party would scrutinize the details, but he predicted the package could amount to major tax breaks for the wealthiest Americans and for businesses like those formerly run by President Trump.

"That's not tax reform," Schumer said on the Senate floor. "That's just a tax giveaway to the very, very wealthy that will explode the deficit."

Speaking Wednesday morning on Capitol Hill, Ryan called Trump's framework "a critical step forward in this effort."

"We've been briefed on what they are going to do and it is basically along exactly the same lines we want to go," Ryan said. "So we see this as progress being made, showing that we are moving and getting on the same page. We see this as a good thing."

Trump's tax plan does have an advantage over Ryan's and other plans, including those supported by some Democrats, that aim to be make up the forgone revenue. While there is broad bipartisan support for plans that both cut rates but make up for it with the elimination of certain tax breaks or reductions in spending, coalitions have frequently fallen apart over where those savings should come from. Many public programs and exemptions and deductions in the tax system have broad popular support, or are defended by powerful interests.

The trouble Trump has is that while his administration says the tax cuts will over time pay for themselves, Congress's nonpartisan budgetary referees at the Joint Committee on Taxation won't work off that same assumption.

Because of the rules of the Senate, legislation that would result in more borrowing over the long term would be vulnerable to a Democratic filibuster, requiring 60 senators to advance the legislation. Republicans hold just 52 seats in the chamber, and absent those 60 votes, Trump and his fellow Republicans would only be able to pass cuts that would last for 10 years.

After that time, the tax cuts would expire unless Congress takes action, setting up another fight over taxes.