Calling it “the biggest tax cut in our history,” President Trump and the GOP leadership in both houses of Congress have unveiled the administraton’s plan to overhaul the U.S. tax system.

“There’s nothing more important to our economy,” Trump said on Thursday at a meeting with House Republican leaders and Republican members of the House Ways and Means Committee. “We see what’s happening with our economy and how well it’s doing. This is going to really bring it to the next level.”

The bill includes many features that could help small businesses, including those that manufacture, distribute and install doors and windows. It also calls for big changes to the individual income tax system. For example, the number of individual tax brackets would go from seven to four, with tax rates of 12 percent, 25 percent, 35 percent and 36.9 percent. The standard deduction would double to $12,000 for individuals and to $24,000 for married couples filing jointly. The estate tax and the alternative minimum tax would go away as well.

However, the legislation also includes a controversial provision to limit the popular mortgage interest deduction, which could harm the homebuilding industry.

A Boost for Businesses

Large corporations would see the corporate tax rate fall from 35 percent to 20 percent, which is lower than the 22.5-percent average of the industrialized world. Trump says it will help keep America competitive in the global economy.

The tax plan would also create a 25 percent tax rate for so-called pass-through businesses, most of which are set up as sole proprietorships or partnerships. In 2014, about 95 percent of the 26 million businesses in the U.S. were pass-throughs, according to the Brookings Institution. They’re called that because the income they generate “passes through” to their owners, who are then taxed under the individual income tax system.

However, the bill would limit the kind of income that would fall under the 25-percent rate. Professional services such as accountants, lawyers and doctors wouldn’t automatically qualify for it.

Other business owners could choose a 70-30 split on their income, in which 70 percent is wages taxed at the individual rate and 30 percent is business income taxed at the pass-through rate of 25 percent. Another option allows companies to create a ratio of wage income to business income based on how much they’re spending on capital investments.

The guidelines are aimed at preventing high-earning individuals from gaming the system by declaring themselves corporations.

Another part of the plan would allow businesses to immediately write off the cost of new investments in depreciable assets other than structures for at least five years.

Plastics Industry Association (PLASTICS) president and CEO William Carteaux said the tax plan would help his industry, which includes many companies that contribute to the manufacture of vinyl fenestration products.

“Earlier this year during the 2017 Plastics Industry Fly-In, men and women from around the country who depend on America’s plastics manufacturing industry came to Washington to advocate for measures that would help create jobs and make their industry more globally competitive,” he said. “There are several key provisions in the Tax Cut and Jobs Act that will help the new manufacturing economy, and assist our members in their effort to continue to succeed, grow and create jobs. We support the inclusion of a lower corporate tax rate, comparable treatment for S corps, and the immediate expensing of capital investments.”

The commercial construction industry also expressed support for the tax plan.

“The tax proposal released today provides a much-needed framework that will provoke important debate about the best way to improve the tax environment for employers and workers,” said Stephen E. Sandherr, the CEO of the Associated General Contractors of America. “In particular, we will work to ensure that pass-through businesses, including the majority of construction firms, also benefit from tax reform.”

Mortgage Meltdown?

The proposal to cap the mortgage-interest deduction on future home sales at $500,000 has grabbed a lot of attention. The current cap is $1 million for couples filing jointly. (Existing mortgages would not be affected.) That could potentially slow the U.S. housing market, which is finally recovering from the great recession that began in 2008. The tax-reform bill would also disallow the deduction for home equity loans, which could harm the remodeling market as well.

The Window and Door Manufacturers Association (WDMA) is especially concerned about this part of the tax plan.

“While WDMA is pleased that the House tax reform bill includes several beneficial provisions such as lowering the corporate tax rate, we have serious concerns regarding the weakening of the mortgage interest deduction (MID),” said Michael O’Brien, WDMA president and CEO.  “The MID not only helps consumers, particularly middle-class taxpayers, buy a home, but also allows them to deduct interest on home equity loans, which are frequently used to replace windows and doors with energy-efficient replacements. Republicans repeatedly declared their intention of preserving the MID, yet this bill makes several changes that could undermine this cornerstone of American housing policy. We remain opposed to attempts to weaken the MID and will be working to ensure this popular and beneficial tax deduction remains intact as currently written in the tax code.”

The National Association of Home Builders (NAHB) is also deeply worried about changes to the mortgage interest deduction.

“The House Republican tax reform plan abandons middle-class taxpayers in favor of high-income Americans and wealthy corporations,” said Granger MacDonald, NAHB chair and a home builder and developer from Kerrville, Texas “The bill eviscerates existing housing tax benefits by drastically reducing the number of home owners who can take advantage of mortgage interest and property tax incentives. And capping mortgage interest at $500,000 for new home purchases means that home buyers in expensive markets will effectively lose this housing tax benefit moving forward.”

According to MacDonald, the House leadership killed an NAHB plan that could have been part of the final legislation. It would provide a homeownership tax credit that would have helped up to 37 million additional home owners who do not currently itemize. Most of them are low- and moderate-income home owners.

“The bottom line: Congress is ignoring the needs of America’s working-class families and small businesses,” MacDonald said. “And by undermining the nation’s longstanding support for homeownership and threatening to lower the value of the largest asset held by most American families, this tax reform plan will put millions of home owners at risk.”

Multifamily Worries?

The multifamily housing sector could also be negatively affected by the bill. The National Association of Local Housing Finance Agencies (NALHFA) is strongly opposed to the tax reform legislation, which the association says would devastate the housing production  at a time when the country faces an affordable-housing crisis.

The group is especially concerned with the termination of the tax exemption on private activity bonds (PABs). This includes multifamily housing bonds, which are critical to the Low Income Housing Tax Credit (Housing Credit) program. According to NALHFA, 40 percent of all Housing Credit developments nationwide use private activity tax-exempt bond financing and the 4-percent credits they generate. The association says the loss of PABs would decimate the production of affordable housing across the country.

“Private activity tax-exempt bonds are an indispensable affordable housing resource for local HFAs,” said NALHFA president Ron Williams. “Close to half of all Housing Credit developments utilize this financing source, and its elimination would cripple the affordable-housing industry.”

In addition, the corporate tax rate drop from 35 percent to 20 percent would likely make investment in Housing Credits less appealing to developers and investors, NALHFA says. When an investor purchases tax credits from a developer under the Housing Credit program, the investor can use those credits to lower their annual federal tax bill. If an investor has a lower tax bill, they will not be willing to pay as much for these tax credits. While the Housing Credit is preserved under this legislation, the lowered corporate tax rate would be devastating to the program.

Lastly, under the proposal the New Markets Tax Credit (NMTC), allocation authority would be eliminated after 2017. The NMTC has been authorized through 2019, so this legislation would get rid of two years’ worth of allocation that has already been authorized. The historic rehabilitation credit would be repealed beginning in 2018, and energy credits would be phased out.

“The housing industry is the foundation of our economy and this tax reform proposal would be detrimental to the affordable housing community,” said Jonathan Paine, NALHFA executive director. “We urge policymakers to think twice before voting on the tax reform proposal and commit to protecting these invaluable programs that are so critical to providing affordable housing to so many that desperately need it.”

What’s Next

The bill should go through House committees next week before going to a vote. (It’s expected to pass easily.) After that, it’ll go to the Senate, where it should face strong resistance from Democrats. Trump said he’d like to sign the legislation by Thanksgiving.

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