June 16, 2024

Adam N. Michel

Ways and Means Committee Republicans recently introduced the American Families and Jobs Act, an economic tax package that addresses significant ongoing tax increases on domestic investment built into the 2017 Tax Cuts and Jobs Act. Most of the Republicans’ major proposed changes in the American Families and Jobs Act expire after 2025, worsening current tax uncertainty and obscuring the necessary reforms’ fiscal cost.

Other than permanence, the American Families and Jobs Act could be significantly improved by adding Universal Savings Accounts for family savings flexibility and neutral cost recovery for currently excluded building investments. The proposed legislation includes a series of other reforms, many that are good and a few that are misguided.

The package is comprised of three bills: the Tax Cuts for Working Families Act (H.R. 3936), the Small Business Jobs Act (H.R. 3937), and the Build It in America Act (H.R. 3938). Here is a brief summary of the most important provisions.

Expensing. The central pro‐​growth component of the package is the extension of full business expensing for R&D, equipment, and machinery. As I recently explained in a Cato brief, the normal tax rules require businesses to deduct their investment spending over time (between 3 and 39 years). Especially during times of high inflation, such as the current economic climate, these rules increase the after‐​tax cost of new investments because the value of the associated tax deduction decreases over time.

The 2017 Tax Cuts and Jobs Act temporarily fixed this problem by allowing businesses to fully deduct the cost of some new investments in the year they are made, called full expensing or 100 percent bonus depreciation. Beginning last year, companies started amortizing research expenses over five years, and beginning this year, equipment and other short‐​lived investments lose 20 percent of their immediate expensing deduction each year through 2026.

The American Families and Jobs Act would allow full expensing for short‐​lived investments and R&D spending through 2025. It would also increase the expensing limit for small businesses to $2.5 million. By not extending full expensing to longer‐​lived assets, such as structures, the legislation does not apply to a significant portion of annual business investment. The legislation could be improved by making the expensing changes permanent and including a neutral cost‐​recovery system for structures, which provides a similar economic benefit as expensing by enabling businesses to index their write‐​offs for inflation and time, such as in the CREATE JOBS Act.

1099 Fixes. The previously obscure 1099‑K form reports business transactions with a credit or debit card or online settlement platforms such as PayPal or Venmo. The American Rescue Plan Act of 2021 lowered the 1099‑K de minimis threshold from more than 200 transactions and $20,000 in total payments to a single $600 threshold. In 2022, the IRS delayed the implantation of this rule as it threatened to sweep as many as 20 million taxpayers into the costly and unnecessary new reporting system. The proposed legislation would repeal the 2021 change.

The legislation also increases the general reporting threshold for other Form 1099 transactions from $600 to $5,000, indexed for future inflation. The current threshold is not indexed for inflation and has not been raised since 1954, when $600 was worth more than $6,500 in today’s dollars. The higher thresholds will ease compliance burdens and lower administrative costs.

Interest expense limitation. Beginning in 2022, the business interest deduction limit switches from 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) to a more restrictive definition of earnings before interest and taxes (EBIT). The tighter write‐​off definition increases the cost of debt‐​financed investments. The Republican legislation would maintain the pre‐​2022 EBITDA base through 2025. Keeping taxes on investment from rising is an important goal, and using EBITDA follows international norms. However, policymakers should remember that the current treatment of interest in the tax code is neither uniform nor ideal and deserves a more holistic reform in the future.

Expanded capital gains exclusion. Under current law (IRC Section 1202), individuals are allowed up to a 100 percent exclusion of $10 million of capital gains on qualified small business C corporation stock. The legislation would expand the exclusion by extending the preferential treatment to S corporations and phasing in the exclusion’s benefit during the 5‑year mandatory holding period.

Among other reasons, keeping capital gains taxes low is critical to spur “investment in startups and growth companies, particularly technology companies,” as explained by Chris Edwards. The expansion of Section 1202 is a step in the right direction of a lower capital gains tax rate. However, Congress should ideally treat all types of investment equally, at one low or zero rate, instead of carving out specific types of investments for preferential treatment.

Repeals select energy credits. The Inflation Reduction Act (IRA) included as much as $1.2 trillion in distorting energy market subsidies, intended to put Washington bureaucrats at the center of critical energy investment decisions. The Republican’s proposal would repeal just 5 of more than 20 tax subsidies in the IRA. The bill repeals two energy credits that do not take effect until 2025 or later and three electric vehicle (EV) credits, leaving a more limited EV credit similar to pre‐​IRA in place.

All of the special‐​interest IRA energy credits should be repealed. If left in the tax code, each new IRA credit will lead to the misallocation of investment, cronyism, and other costs that are almost always the result of targeted industrial subsidies.

Temporary increase to standard deduction. The current‐​law standard deduction for families is about $28,000 ($14,000, single) through 2025, when it gets cut in half as the 2017 tax cuts expire. The proposal would temporarily increase the standard deduction by $4,000 for married filers ($2,000, single) below $400,000 in earnings ($200,000 single) in 2024 and 2025. Congress should focus on making the current‐​law standard deduction permanent instead of this $4,000 bonus that will increase the cost and complexity of the 2025 fiscal cliff.

Moving more taxpayers off the complicated itemized tax system and to the standard deduction is a worthy goal. However, it should be done by limiting the value of specific deductions, such as those for state and local taxes or mortgage interest, instead of expanding the standard deduction. Alex Brill, Kyle Pomerleau, and Grant M. Seiter estimate that the temporarily larger deduction would lead to about 4.1 million more taxpayers relying on the standard deduction. The larger standard deduction would also mean more Americans are entirely exempt from paying any income tax and is not well‐​targeted at other goals, such as inflation remediation.

Rural Opportunity Zones. The 2017 Tax Cuts and Jobs Act created Opportunity Zones that offer lower tax rates on specific investments in designated low‐​income Census Tracts. The proposed legislation would create a new Opportunity Zone designation targeted at poor, rural Census Tracts.

As Joel Griffith and I detailed in 2019, 40 years of academic and government studies “consistently show place‐​based development programs fail to increase employment, raise wages, or advance general economic opportunity for targeted residents.” Despite limited data, the evidence from Opportunity Zones has largely confirmed that the targeted preferences primarily subsidized already‐​in‐​the‐​works projects in wealthy areas. Adding new Opportunity Zones would be a mistake. Instead, Congress should lower the capital gains tax rate for everyone, to let private individuals instead of Congress determine the most productive locations for new investment.

Land tax. The legislation would impose a 60 percent excise tax on the purchase of farmland by citizens of “countries of concern,” such as China, Russia, and Iran. Scott Lincicome and Ilana Blumsack explain that “there’s little current indication that foreign farmland purchases – even by Chinese entities – justify the type of broad‐​based government restrictions that some in Congress are contemplating.” They go on to show that combined, all foreigners own just 3.1 percent of private farmland in the United States, and China is not even in the top 10 countries that hold the most U.S. farmland. Narrowly tailored rules restricting foreign land purchases near military assets may be justified, but punitive taxes or other bans on land purchases from entire countries are misguided.

The legislation makes other changes, such as repealing the superfund tax and addressing foreign tax credit regulations.

Room For Improvement

The most critical pieces of the pro‐​growth economic tax package—full expensing for R&D, equipment, and machinery—address costly tax increases already making domestic investment more expensive. The proposal could be significantly improved by making these reforms permanent and adding neutral cost recovery for investments in structures.

The legislation would also benefit from adding a Universal Savings Account, which would operate like retirement accounts but without restrictions on how taxpayers spend the funds. Additionally, several of the provisions are targeted capital gains tax cuts—Opportunity Zones and Section 1202—it would be best if the legislation simply cut the capital gains rate for all investments.

The Joint Committee on Taxation estimates the bills would lower revenue by about $21 billion over ten years but, if made permanent, would be significantly more costly. Repealing all the IRA tax credits and curtailing itemized deductions instead of boosting the standard deduction would more than offset the lost revenue from critical pro‐​growth tax reforms.