Oct 31 (Reuters) - Special-interest lobbyists were digging in on Tuesday to defend their pet loopholes against a tax-cut plan from Republicans in the U.S. Congress and President Donald Trump, which was expected to be unveiled in legislative form on Wednesday.
Here are some of the most contentious issues in the tax debate, which still had weeks and possibly months to play out before any decisive action can be taken by the U.S. Congress.
401(k). Republicans are eyeing new limits on how much money Americans can pump each year into their 401(k) retirement accounts on a pre-tax basis. Tighter contribution limits would produce new tax revenues for Washington and help Republicans pay for tax cuts they want to push through for high-income earners, corporations and wealthy families’ inheritances.
Fund management firms that manage 401(k) plans, Wall Street firms that execute trades for them and the 54 million Americans who have 401(k) accounts could be hurt by such a change.
Mortgages. Americans can now deduct mortgage interest from their incomes if they itemize deductions. The plan does not call for changing that directly, but it does call for doubling the standard deduction, a separate tax return line that determines eligibility for itemizing. Doubling that would mean fewer Americans itemizing. So, fewer could deduct mortgage interest, leaving the deduction available only to higher-income people.
The National Association of Home Builders has declared its opposition to the Republican plan, saying it would make the mortgage interest deduction “only for the super-rich.” The group proposed creating a new tax credit for mortgage interest.
SALT. Another popular tax deduction is the one for state and local tax (SALT) payments. Republicans are weighing limits on this to help raise revenues to offset the tax cuts they want.
Democratic and Republican lawmakers from high-tax states, such as New York, California and New Jersey, oppose this change because it would hit their constituents hardest.
Real estate interests have fought for an exemption of state and local property taxes that is expected to make it into the bill. They say killing the deduction for property taxes would raise home ownership costs.
Pass-throughs. Republicans want to cut the tax rate paid by the owners of “pass-through” businesses, such as partnerships and sole proprietorships, to 25 percent from 39.6 percent.
Winners from this would include many pass-throughs that are small, mom-and-pop businesses, but it would also benefit big enterprises, such as hedge funds and real estate partnerships. Losers would be upper middle-class wage-earners unable to channel their incomes through pass-through structures.
Some tax experts warn slashing the pass-through rate could unleash new tax-dodging schemes to enable Americans to do just that: run their personal incomes through pass-through structures such as partnerships, S corporations and sole proprietorships.
Business interest. Another change being evaluated by Republicans is ending or further restricting tax deductibility of business interest. This would mean that business borrowers could no longer write off the interest they pay on their debts, another move to raise new federal revenues.
Businesses have formed a group, called the BUILD Coalition, to oppose the Trump plan’s business interest provision. On its web site, the group says “Limiting interest deductibility would hinder businesses’ ability to finance new investments, expansions and innovations, and create new jobs.”
Members of the group include Abbott Laboratories, Owens-Illinois, S&P Global and lobbying groups for many private equity firms, farmers, mortgage bankers, real estate investment trusts, casinos and equipment leasing groups.
Deficit. Not long ago, most Republicans stood firmly against increasing the federal budget deficit and the national debt, but analysts say their tax plan would hugely expand both.
Washington was expected to collect $3.3 trillion in taxes in 2017, but spend $4 trillion, leaving a deficit of $700 billion. Previous deficits have piled up a national debt of $20 trillion.
The Trump tax-cut plan would reduce federal tax revenues by $2.4 trillion in the first 10 years and by $3.4 trillion in the 10 years after that, adding greatly to the deficit and the debt, according to the Tax Policy Center, a nonpartisan think tank.
The plan would give a small boost to the economy, but soon be overwhelmed by the rising economic burden of federal debt, said the center in a study of the plan released last week.
Helping the rich. The tax plan has struggled since it was unveiled as a rough framework in September with criticism, from Democrats and social activists, that it is a give-away to the wealthy and corporations that hurts or neglects others.
On that issue, the Tax Policy Center study said, “In 2018, all income groups would see their average taxes fall, but some taxpayers in each group would face tax increases. Those with the very highest incomes would receive the biggest tax cuts.” (Reporting by David Morgan and Amanda Becker; Editing by Kevin Drawbaugh and Chris Reese)