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Industry still on guard over GOP tax plan

American Benefit Council’s Lynn Dudley

The broad strokes of the Republican tax reform framework unveiled Sept. 27 aims to protect retirement tax incentives — but industry experts say it would be a mistake to assume the risk has passed.

That nine-page framework calls for lower individual and corporate tax rates and the elimination of many deductions, but would maintain tax incentives for retirement savings and deductions for home mortgage interest and charitable contributions.

While those are positive indications, said Lynn Dudley, senior vice president for global retirement and compensation policy at the American Benefits Council in Washington, "the council remains concerned that lawmakers will seek to alter the tax incentives for employee benefit plans later in the process, as the need for federal revenue offsets becomes more acute."

Asked how retirement savings will be affected, House Ways and Means Committee Chairman Kevin Brady, R-Texas, told the U.S. Chamber of Commerce that Republican leaders are very aware "that we are ​ not a nation of savers; we need to be." To that end, he said, "we are protecting current incentives for tax deductibility, tax free savings in (plans)."

As House and Senate tax-writing committees fill in the details over the coming months, advocates for retirement plan sponsors and service providers are on alert that legislators could mandate a whole or partial shift to Roth post-tax retirement savings accounts in order to offset revenue losses from the proposed tax cuts.

That threat was real enough to prompt 16 Democratic House members to write the House Ways and Means and Senate Finance committees, warning that any projected revenue from a change to Roth "is largely illusory" because it only looks at a 10-year budget window instead of considering taxes paid in later years.

That idea of "Rothification" is shortsighted, said Ms. Dudley, and "a dangerous experiment that could have seriously negative effects on individuals' savings behavior."

Tax brackets reduced

Aimed at simplifying the tax code, the Republican plan calls for reducing the number of individual income tax brackets to three from seven and capping income taxes at 35% instead of the current 39.6% but allows negotiators to consider a higher rate for the wealthiest. It also would repeal the estate tax.

Corporate tax rates would drop to 20% from 35%, and pass-through businesses would see their rate capped at 25% down from the current cap of the 39.6% individual rate. Deductions for interest expenses used by private equity, real estate and other businesses would be reduced.

Mike Sommers, president and CEO of the private equity advocacy group American Investment Council in Washington, agrees that the country "is in desperate need of pro-growth tax reform," and the framework "includes many smart solutions for a simpler and fairer tax system."

But the former top House aide, who had a front-row seat during many tax debates over the past two decades in Congress before joining the private equity group in 2016, worries about the proposed limit to interest deductibility. He called that deductibility "an essential component of businesses which rely on debt financing."

"Our industry is committed to sustainable economic growth by advancing access to capital, job creation and retirement security through responsible long-term investment, and we believe tax reform requires similar long-term growth solutions," said Mr. Sommers.

Economic growth projections will play a central role in the coming months, as negotiators figure out how to pay for the proposed tax breaks.

The non-partisan Committee for a Responsible Federal Budget in Washington estimates that, based on the preliminary details, the plan calls for roughly $5.8 trillion of tax cuts and adds $3.6 trillion in tax revenue because of fewer deductions. Under that estimate, the federal deficit would increase by $2.2 trillion.

"It would be impossible to offset this amount solely through higher economic growth," the group said. While the White House is assuming 3% annual economic growth, "tax reform itself is unlikely to improve growth by more than a few decimal points. If anything, the added debt would slow growth over the longer term and further add to the cost of the tax plan," it said. To ensure that tax reform doesn't add to the debt, negotiators will "need to put enough tax breaks on the table to make that happen or scale back the tax cuts they have proposed."

Tax revenue losses would also put pressure on funding for already strained programs such as Medicare, Medicaid and Social Security.

Must be fiscally responsible

Finding a way to pay for tax cuts without adding to the debt will be essential for gaining the support of Democrats. "Any tax reform package that we could support must be fiscally responsible, and at least revenue neutral," said Rep. Richard Neal, D-Mass., ranking member of the House Ways and Means Committee.

Mr. Neal dismissed projections that the tax cuts would pay for themselves through economic growth, and holds out little hope for the bipartisan support in Congress that was essential for the last major tax system overhaul in 1986 to succeed. So far, he said, "this has been a partisan process from the start with virtually no Democratic input."

Senate Finance Committee Chairman Orrin Hatch, R-Utah, one of the "Big Six" congressional tax reform players, said he welcomes bipartisan support, promising "a robust legislative process."

President Donald Trump noted in a Sept. 27 speech that "tax reform has not historically been a partisan issue, and it does not have to be a partisan issue today. I really believe we're going to have numerous Democrats come over and sign because it's the right thing to do."