Tax bills for most small construction companies would be lowered under a broadly outlined tax reform proposal unveiled Sept. 27 by the Trump administration and congressional Republicans.
But the proposal is a long way from becoming law, because many of the details must be worked out by Congress. Democrats immediately attacked the plan, contending it would provide too much to the wealthy and not enough to the middle class.
Under the proposal, the corporate tax rate would be cut to 20%, from 35%. There would be three individual tax brackets, with rates of 12%, 25% and 35%, compared with the current seven brackets and a top rate of 39.6%, according to the Tax Foundation.
Perhaps most importantly to small construction firms, the pass-through tax rate for businesses would be limited to 25%. Pass-through entities, such as sole proprietorships, partnerships and S-corporations, are taxed at individual, not corporate rates, which hurts many construction companies that fall under those categories.
Historically, construction has faced the highest effective tax burden of any industry, according to a previous analysis by the U.S. Treasury Dept.
“By lowering the pass-through rate, the plan will reduce the tax bill of thousands of small businesses and help to spur job and economic growth,” Granger MacDonald, chairman of the National Association of Home Builders said in a statement.
The Associated Builders and Contractors also lauded the GOP-drafted framework. “The equivalent rate reduction envisioned in the framework for businesses on both sides of the code, paired with a broader tax base, moves toward ABC's vision of fair treatment for all companies regardless of size, structure or sector,” says ABC President and CEO Michael D. Bellaman.
There is much work to be done, however, Bellaman and others cautioned.
“This is the beginning of what is going to be a complex process,” says Dave Bauer, American Road & Transportation Builders Association senior vice president. Bauer He says he doesn’t expect the final product to look like what has been proposed.
“There’s a lot of unanswered questions here,” says Steve Hall, American Council of Engineering Companies vice president of government affairs. “And that list gets longer the more we look and think about it.”
Hall notes the proposal would eliminate the “section 199” deduction for domestic production that ACEC helped create. In the proposal released by the White House, the deduction is called unnecessary because, “domestic manufacturers will see the lowest marginal rates in almost 80 years. In addition, numerous other special exclusions and deductions will be repealed or restricted.”
In addition, the proposal would allow companies to expense all capital expenses for five years, a measure that Bauer says ARTBA supports.
Democrats oppose plan
The first step in the tax overhaul, congressional Republicans said during a Sept. 27 press conference, is for an upcoming budget resolution to include language instructing the appropriate House and Senate committees to turn the framework into legislation. As the proposal stands now, however, Republicans are likely to face opposition from Democrats at every step.
Sen. Ron Wyden (Ore.), the top Democrat on the Finance Committee, the key committee for tax reform in that chamber, said Sept. 27 that the proposal would enable tax cuts for the “ultra-wealthy and multinational corporations by gutting Social Security and Medicare.” Several Democrats echoed those concerns.
House Speaker Paul Ryan (R-Wis.), however, called the proposal “vital and urgent." Ryan added, “For all of us, this is a now or never moment. The choice before us is really clear.”
While the proposal may be a work in progress, at least it is progress, many observers note. “It’s a step in an evolution process and there’s going to be more steps in this process,” says ACEC's Hall.
He adds, “But if it means that the ball is now in Congress’s court to start to fill these details in, and to try to assemble a package that can pass the House and pass in the Senate, that’s a good thing. We want this process to move forward.”