Who Could Be the Biggest Losers of Tax Reform?

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While we don't know what a final tax reform package might look like, the House and Senate have both released their own versions of the Tax Cuts and Jobs Act. Based on what we know so far, there's a strong possibility that certain groups could see their taxes rise. Here are some of the groups we think could be the biggest losers of tax reform.

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A full transcript follows the video.

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This video was recorded on Nov. 20, 2017.

Michael Douglass: Let's talk about potential losers a little bit. One of the things that really jumped out at me is that the House proposal repeals the student loan interest deduction. That would certainly seem to be a pretty big benefit for students that's basically going to disappear if that bill becomes law.

Matt Frankel: Yeah, it would absolutely affect student loan borrowers, especially with student loan debt going higher and higher in recent years. But it's not only the student loan deduction. The Republican bill actually makes a whole lot of changes for college students, both in and out of school. For example, the lifetime earning credit, that would go away. That's the one that kicks in after you've used up the American Opportunity credit, or for grad students, or if you're just taking a class for personal enrichment. The whole credit that covers that would go away. Right now, if your employer reimburses you for tuition up to a certain amount, it doesn't count as taxable income. This current bill would change that. Same with grad students who get tuition waivers. There are a lot of experts in the student loan world calling this bill an attack on grad students. It would make that taxable income, which a lot of college students can't afford, because if you get a grad student tuition waiver, that could be tens of thousands of dollars that you would now have to pay tax on. So, this bill has several changes that college students need to be aware of.

Douglass: Yeah. My best friend is a Ph.D. student, and he would have a lot of trouble, let's say, making ends meet if he had to cover the taxes on his waived tuition through his student stipend. Let's also talk about taxpayers in higher-tax states. This is known as the SALT deduction -- State And Local Taxes. It would go away entirely in the Senate bill, and the only part of it that would be preserved is the property tax deduction up to a certain amount in the House bill.

Frankel: Right. That's definitely a move to appease the more moderate Republicans who live in these high-cost states like New York and New Jersey. Basically, the House's bill would allow people to deduct up to $10,000 of property tax each year. If you live in a low-tax state, that's really not as big of a deal. But, neither bill allows anybody to deduct any state income taxes. Which, if you live in California, New York, New Jersey, any of those states with high marginal income tax rates, you would be a big loser of this bill, potentially, even in the middle class. I actually think the SALT deduction has been, over the past few years, the highest dollar IRS deduction available, including mortgage debt and pretty much anything else, by a significant margin. So, this is a big deal, and it disproportionately, like I said, places like California, New York, New Jersey. Is D.C. a high-tax area?

Douglass: It is.

Frankel: So, people up in those areas are not fans of removing the SALT deduction, and are aggressively lobbying against that. So, we'll have to see if that makes its way into a final bill or not.

Douglass: Absolutely. The other thing that's interesting is the way Social Security raises are calculated could potentially change. In the Senate bill, there is a proposal on the table to change how Social Security costs of living increases are calculated each year. Currently, they're weighted by the Consumer Price Index, but the proposal would be to change over to what called the Chained Consumer Price Index, or CPI, which would essentially likely lower the raises that seniors might get from Social Security each year.

Frankel: This is actually the opposite of what many experts say they need to do. Currently, these are based on what's called the CPIW, which is a basket of costs that affect working-age individuals. The Chained CPI would effectively lower the rate at which inflation is calculated. There's another one called the CPIE, I'm not sure the abbreviation, but the CPI that is weighted toward the elderly. This would put more weight on things like healthcare expenses. Seniors actually tend to experience higher inflation than the rest of the population, not lower, so this is kind of going in the wrong direction.

Douglass: Right. And that's certainly a big deal for seniors. Finally, let's talk briefly, and I mean very briefly, about the Affordable Care Act, known more commonly as Obamacare. The Senate bill would change how ACA requirements are done. Currently, the way it works with the Affordable Care Act is, you have to have insurance, or you pay a fine. The Senate bill would basically take that fine and reduce it to $0, which would essentially de-fang the individual mandate.

Frankel: This was a request of the president, I'm pretty sure that's why it's in the bill. I'm pretty sure this was a subject of a tweet shortly before the bill came out. Whether you're in favor or not of repealing the individual mandate is another issue. Whether you want to attach it to tax reform is the subject on the table right now. And we all saw what kind of success Congress had with passing anything related to the Affordable Care Act, even among Republicans. So, this is, at this moment, thought of something that could unnecessarily complicate the process. So I would not be surprised to see that go away when we have any kind of unified bill. But for the time being, this is what the Senate wants to attach to its bill, and their rationale for doing so is, it would raise money that would pay for some of the other tax cuts.

Douglass: Sure.

Frankel: We'll have to see what eventually will come into the final bill. But, I don't see anything related to healthcare being in there, just because Republicans really want to get this done and that makes it much more complicated to do.

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