To lower rates for the most people, the Republican tax plan calls for getting rid of nearly all itemized deductions, even one Congress just expanded.
Congress moved quickly last week to allow victims of Hurricanes Harvey, Irma and Maria to write off more of their losses from federal income taxes, passing a bill that President Trump signed just a week after it was introduced.
But the deduction that bill expanded could be eliminated entirely under the tax plan Republican House and Senate leaders and Trump unveiled last week.
Rep. Kevin Brady, a Texas Republican who chairs the Ways and Means Committee and is a key architect of the tax plan, told the conservative Heritage Foundation last week that getting rid of deductions that only benefit a few people leads to lower rates for the most people.
“We’re eliminating the current maze of special interest loopholes that benefit special interests but offer nothing but confusion for working families,” Brady said Thursday morning.
Later that morning, the House approved a Brady-sponsored bill to expand an existing deduction for uninsured theft and casualty losses so that victims of Harvey, Irma and Maria could write off any losses worth more than $500.
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Without the change, those victims would face the same limitation faced by any homeowner whose house burns down or is destroyed by a tornado or flood: Only losses that exceed 10% of adjusted gross income would be deductible.
“Hundreds of thousands of families have lost everything — even loved ones,” Brady said before the bill’s passage. “This legislation will help them begin to recover through meaningful, targeted tax relief they need now.”
The nine-page tax overhaul framework released by Republicans last Wednesday lacks many details about how to pay for promised tax cuts, but it does say that just two of the itemized deductions in the current tax code would remain: charitable contributions and home mortgage interest.
It says nothing about retaining the theft and casualty deduction for uninsured economic losses from events such as fire, flood, hurricane or tornado. Asked specifically whether the deduction would be retained, Brady’s office said only that Ways and Means Committee members continue to work on the treatment of specific deductions.
“The Republican tax break proposal is one giant contradiction,” said Rep. Lloyd Doggett, D-Texas. “It takes away disaster relief expanded last week, eliminates the medical expense deduction, which was expanded in their failed Obamacare attack, and claims middle class tax relief, while overwhelmingly showering individual tax benefits to the top 1%.”
The situation illustrates the difficulty Congress may face in passing comprehensive tax reform because every line on the tax return got there because lawmakers decided it helped serve their constituents, or their political careers, to put it there.
If Brady fights to keep the disaster-loss deduction because of its importance to his constituents, other members will want to retain line-items that help their constituents.
“I’ve been through a lot of tax reform efforts; they’re never easy,” said former Senate majority leader Trent Lott, a Republican from Mississippi who was instrumental in passing a similar expansion of the disaster-loss deduction after Hurricane Katrina in 2005. “People get the deductions and the credits, and when you go for something big, you hear about it.”
Lott said lawmakers need to “keep their eye on the ball” and focus on overall reform, but he also said he doubted the deduction for disaster losses would be eliminated entirely.
“What we saw laid down was skeleton,” he said of the framework. “They’re going to have to come up with more offsets, they’ll wind up keeping some of the deductions and credits.”
The disaster-tax bill Brady sponsored last week also made it easier for taxpayers to take money out of their retirement accounts without penalty to pay for disaster recovery, and it lifted the existing cap on deductible charitable contributions for gifts to disaster relief agencies.
The charity piece of the bill probably won’t be affected by tax reform, but it’s unclear what Congress plans to do about retirement plans. The framework says incentives for saving for retirement will be continued, but laws will be changed to “simplify these benefits.”
If Congress does get rid of everything but mortgage interest and charitable contributions, it’s possible the expanded deduction Trump signed Friday will benefit no one.
That’s because some in Congress and Trump’s administration have said they are trying to make the tax overhaul retroactive to cover 2017, meaning it would erase a tax cut that was implemented in 2017.
As deductions go, the casualty or theft losses is not normally a budget breaker. The Joint Committee on Taxation estimated the “cost” — the amount of tax revenue that would be collected if it were not there — as between $400 million and $500 million a year between 2016 and 2020.
According to Internal Revenue Service data, about 90,000 tax filers declared $2.2 billion in losses in 2014. That reduced their taxes by about $400 million.
But use of the deduction spikes in years with catastrophic natural disasters.
In 2012, the year Superstorm Sandy hit, 160,000 families claimed nearly $5 billion in damages. And after Hurricanes Katrina, Rita and Wilma in 2005 — the last year Congress approved a similar expansion of the disaster tax break — the provision was used by 814,000 filers, who wrote off nearly $15 billion in losses.
