On April 26 — following months of suspense — the Trump administration released a brief proposal of its plans to overhaul the U.S. tax code and create dramatic cuts for both individuals and businesses.
The proposal, which the administration has referred to as “the biggest individual and business tax cut in American history,” would slash tax rates, restructure the tax system for both individual filers and corporations and would eliminate long-criticized mechanisms such as the Obamacare tax, the estate tax and the alternative minimum tax.
The proposal is not without critics, but some local tax professionals and attorneys are optimistic about its potential to positively impact the Colorado Springs economy — although, for now, they maintain a wait-and-see approach.
Colorado Springs-based estate planning attorney Robert Keyser characterizes his personal approach to the proposal as “guarded enthusiasm.”
“I’m encouraged the current administration is addressing this problem — it’s long overdue — but it’s going to be very challenging to put meaningful changes in place,” he said. “It’s too good to be true as it is, but I think it lays a good foundation for viable reform in the future.”
Like many in industries dealing in taxes, Keyser said the proposal will be followed by potentially significant modifications before any meaningful tax-slashing legislation passes both the House and Senate.
Another contributing factor to Keyser’s guardedness relates to how such a plan would impact America’s bottom line.
“If you’re cutting taxes across the board,” he said, “how are you going to make up for that lost revenue?”
Under the plan proposed last week by Trump, the current seven-bracket personal income system (ranging from 10 to 39.6 percent) would be replaced with a three-bracket system (12 percent, 25 percent and 33 percent). It would also more than double the current standard deduction from $6,350 to $15,000, individual filers ($30,000 for married) and roll back many current itemized deductions.
“If you pay a lot of real estate taxes and you have a lot of medical expenses, or some other kind of itemized deduction that might get limited — that could be a detriment,” according to CPA Greg Gandy, tax director at Colorado Springs-based accounting firm BiggsKofford.
But Keyser said such measures, although risky, could result in a much-needed simplification of a long-convoluted system.
“It’s refreshing that there may be some simplification,” Keyser said.
Major tax reform in the U.S. hasn’t occurred since 1986. Since then, the nation’s tax code has become “convoluted with a lot of special interest provisions,” according to Keyser.
Those complications mean that today, more than 98 percent of taxpayers need help filing their tax returns each spring.
Perhaps the most impactful aspect of the proposal is its plan to decrease the corporate tax to a 15-percent flat rate across the board.
“I think a lot of businesses located here would benefit from the corporate tax cut,” Keyser said. “I don’t know that anybody in any community wouldn’t benefit from this.”
However, while some see the corporate tax cut as good for businesses, some also worry about the potential impact it will make on the federal deficit. According to the Tax Policy Center, the plan would cost the country an estimated $9.5 trillion in the first 10 years — with a third of that coming from the corporate tax reduction.
Others await the results of Trump’s larger plan, which would use tax cuts to stimulate economic growth.
“All this is about repatriating profits back to the United States — that’s going to make up for a lot of that revenue,” said Gandy. “I think that is probably the biggest revenue generator in the plan.”
Gandy shares Keyser’s guarded enthusiasm, and said that the local business climate would have much to gain if legislation mirroring the proposal were to pass Congress.
“Nothing is for certain,” Gandy said. “But I think it would be very beneficial for Colorado Springs, because it would create excess capital that small businesses could use to hire people and expand — that’s very positive.”
Gandy and Keyser agree that the proposal also includes plenty of other details that could prove beneficial for local business, such as the elimination of the estate tax, the alternative minimum tax and the Obamacare tax.
Perhaps the most popular piece of the proposed plan is the elimination of the alternative minimum tax, which the administration has called a “second tax system.” That’s because the AMT is a supplemental income tax imposed in addition to baseline taxation when an individual or business has exemptions that allow them to pay less than the standard income tax.
“It’s a tax that hits people now when it shouldn’t,” he said. “And it’s also extremely complicated.”
For that reason, Gandy suggested that doing away with the AMT could mean that individuals who have, in the past, had to pay for tax preparation may soon be able to go it alone.
Another provision of the plan, which would overwhelmingly impact the country’s most wealthy, is the proposed elimination of the estate tax (also known as the “death tax”).
Keyser said “that wouldn’t come on the radar for most people,” but it would benefit many of his clients. It currently taxes the assets of those with more than $5.49 million at a 40 percent rate upon their death.
The administration also is pushing to eliminate the Net Investment Income Tax (better known as the “Obamacare tax”), which places an additional 3.8 percent tax on long-term capital gains for higher-income taxpayers.
“This proposal, as outlined on [April 26], would substantially benefit small businesses,” Gandy said. “I think it’s going to create more liquidity in the community.”
Although BiggsKofford doesn’t work with many nonprofits, Gandy said that he believes they would be significantly and positively affected by this tax plan because it eliminates the current limits on charitable contributions.
“If I were a nonprofit … that would make me smile,” he said.
“Some people are charitable because they want to be charitable; others are charitable because of the tax benefits that come with it.”