Happy New Year. And welcome to 2019, a year when several important tax policy issues are likely to hit the news. Watch for these: Whether Congress will make changes to the 2017 Tax Cuts and Jobs Act (TCJA), the potentially chaotic 2018 tax filing season, how states respond to last year’s Wayfair decision on online sales taxes and to their TCJA tax windfall, the fate of President Trump’s tariffs, the future of Europe’s digital taxes, and the tax policy ideas likely to surface in the battle over the Democratic nomination for president.
Here is a quick rundown on each:
Will Congress revise the TCJA? There is no chance a divided Congress will overhaul the TCJA this year, but lawmakers may fiddle around the edges. Congress has dozens of technical corrections to the law on its plate, as well as other changes that seem widely popular. One would fix a provision that (seemingly inadvertently) requires restaurants and retailers to depreciate the cost of certain equipment over an even longer period than under prior law. This found its way into a bill that made depreciation more generous for most other assets. Democrats who now control the House also may try to adjust the $10,000 cap on the state and local tax deduction.
Wither expiring tax provisions. There are several TCJA provisions due to expire by the end of the year, including the work opportunity tax credit and the new markets tax credit. The medical expense deduction floor that the TCJA set at 7.5 percent of adjusted gross income is scheduled to revert back to the old floor of 10 percent. Excise taxes that the TCJA lowered on beer, wine, and distilled spirits are due to rise at the end of 2019. And Congress may try to address a few dozen tax extenders from 2017 that it never dealt with last year.
The tax filing season. This will be the first April that taxpayers will confront the many individual income tax changes of the TCJA. They may have some unpleasant surprises such as the SALT cap and the loss of personal exemptions; and some happy ones such as the bigger standard deduction and the demise of the Alternative Minimum Tax for nearly everyone. Refunds may be more—or less—than they expect, especially for those who left their tax withholding on auto-pilot last year. But tax filing will be different and inevitably confusing to many. The ongoing shutdown of the IRS won’t make it any easier.
States have work to do. Many states already have changed their tax laws to respond to the Supreme Court’s Wayfair decision that allows them to require online and catalogue retailers to collect sales taxes. But several states have yet to set rules for how online and mail order sellers need to operate. One issue: Developing rules for small sellers, including those that use online marketplaces like Amazon.
The states also must decide what to do with the additional income tax revenue many got as a result of the TCJA. The 2017 law’s repeal of the federal personal exemption generated a revenue windfall for states that piggyback on federal tax law. But it will result in tax increases for many large families—one that probably is politically unsustainable. And some states will be eying new sources of revenues from legalized marijuana sales and sports betting.
Trump’s tariffs. The president’s ongoing trade war with China will likely reach some resolution this year—either through higher tariffs or by the countries resolving at least some of their disputes. Congress faces an uncertain vote on the revised trade agreement with Mexico and Canada. Support–and opposition—to the deal crosses party lines. The resolution of these issues could have a significant impact on the economies of the US and the other affected countries.
Europe’s digital tax. A European-wide effort to impose a digital tax on firms such as Facebook and Google fell apart in 2017. But France and Austria already have announced plans to go it alone. How many others will follow suit? And, at some point, would the tech giants prefer a single tax to multiple levies?
Presidential politics. Dozens of Democrats are mulling presidential runs. And it is a good bet that many will make taxes a top priority. One possible candidate, California Senator Kamala Harris, already has proposed a generous new tax credit for low- and moderate-income households. Another, Ohio Senator Sherrod Brown, would expand the existing Earned Income Tax Credit. Others surely will have their own plans for using the tax code to redistribute income from the wealthy to “middle-class” voters. Many likely will talk about restructuring the TCJA to raise taxes on high-income households and corporations, though they may soft-peddle those ideas if the economy slows.
Congress will confront its issues at a time when the federal budget deficit is rising to unsustainable levels, the economy shows signs of slowing, and the 2020 election campaign is beginning to heat up. With that backdrop, tax policy is in for a busy, and uncertain, year.