2 big features of tax bill won't adjust for inflation

WASHINGTON -- The Republican tax plan bestows an infusion of cash on nearly every taxpayer next year, providing extra income that is likely to please millions of households, support consumer spending and perhaps give the economy a short-term lift -- at first.

Over the next several years, multiple analyses of the bill have found, those tax cuts will gradually fade -- and then morph into tax increases for a majority of people who are solidly middle class.

Two features in the tax bill -- a child tax credit and a $10,000 limit on state and local tax deductions -- won't adjust to keep pace with inflation, thereby reducing their value each year. What's more, the individual tax cuts are to expire after 2025. And once the individual tax rates revert to their former levels, a stingier inflation gauge would raise taxes for most households.

President Donald Trump has largely sidestepped these trade-offs in promoting the overhaul, a measure whose benefits largely favor corporations and wealthy individuals.

"The heart of our bill is a tremendous amount of relief for the middle class," the president said Wednesday. "It will be an incredible Christmas gift for hardworking Americans."

Trump has also said that "whoever" is president in 2025 would ensure that the expiring tax cuts for individuals are renewed. But doing so would cost heavily: The national debt would likely balloon by more $2 trillion -- far more than the $1.5 trillion increase that lawmakers approved for the tax cuts -- according to an analysis by the Committee for a Responsible Federal Budget.

The rising debt could eventually force spending cuts to social and educational programs that serve many who aspire to join the middle class. Trump and House Speaker Paul Ryan have both raised the prospect of reducing spending on social services next year, with Ryan specifically mentioning changes to Medicare.

Trump, Republican lawmakers and their allies are betting that higher take home pay from the tax cuts will shore up public support for a bill that polls show a sizable number of Americans view unfavorably. They also appear confident that ordinary Americans will have no objection if corporations and the wealthy receive the bulk of the tax-cut gains as long as middle-class households, on average, also receive some benefits.

More than 80 percent of taxpayers will receive tax cuts in 2018, according to an analysis by the nonpartisan Tax Policy Center. These tax cuts skew most heavily toward the top 5 percent of earners. This group -- with incomes starting at $307,900 -- would collect 42.6 percent of the tax cuts. By 2027, they would get no less than 99.2 percent of the tax cuts.

By contrast, a majority of people earning less than $93,200 would, on average, absorb a tax increase in 2027.

"The tax bill gives a big tax cut to corporations with the hope that, eventually, it will boost wages at the bottom," said Elaine Maag, a senior researcher at the Tax Policy Center. "But it does seem a little counterintuitive that you would raise taxes on low- and middle-income families that are struggling."

One reason that the tax bill favors the wealthy is how it would account for inflation. The current $1,000 child tax credit would double to $2,000. The credit would remain at $2,000 for eight years, without any adjustment for inflation, before reverting back to $1,000.

Some policy advocates note that the child credit wasn't previously adjusted for inflation. But the expanded child credit helps offset the bill's elimination of personal exemptions for children and parents that until now have reduced taxable income. Personal exemptions have been increased yearly to account for inflation -- a benefit that will now end.

Also the $10,000 cap on deducting state and local taxes is not adjusted for inflation. If the cap were adjusted for inflation at 2 percent, for example, it would likely have reached above $11,700 in 2025 rather than remain at $10,000.

Supporters of the tax overhaul counter that Americans will look past the fine print of the bill and judge it based on their own individual incomes, the likelihood of pay raises resulting from corporate tax cuts and the health of the economy.

"Americans right now are skeptical, really, of anything that comes out of Washington -- you've got to prove it to them," said Tim Phillips, president of Americans for Prosperity, a group backed by the Koch brothers network of donors that helped campaign for the overhaul.

Phillips said he thinks middle-class households will embrace the tax plan if their incomes start to climb and economic growth surges.

"What Americans will focus on is whether or not this tax cut actually makes them more prosperous and makes the country more prosperous," he said.

A Section on 12/21/2017