The Senate Finance Committee (SFC) recently passed its tax reform proposal — the “Tax Cuts and Jobs Act.” This bill, like the House-passed tax legislation, warrants the attention of older Americans. Not only because it increases taxes on some taxpayers 65+, but also because it would trigger rules that, barring congressional action, would result in automatic cuts to federal programs. According to the non-partisan Congressional Budget Office, those cuts would be $136 billion in fiscal year 2018, $25 billion of which must come from Medicare.
In some ways, the House and SFC tax bills are similar. For example, both bills double the standard deduction, eliminate personal exemptions, reduce individual income tax rates, eliminate certain itemized deductions, and cut the maximum corporate tax rate from 35 percent to 20 percent. Both bills would also change the way tax parameters are adjusted for inflation in order to raise taxes.
In some important aspects the two bills diverge. For example, under the SFC bill, a large number of individual tax relief provisions expire after 2025 to comply with a technical Senate rule. In addition, the SFC bill would retain two current-law provisions important to taxpayers 65+: the extra standard deduction for the blind and older taxpayers and the medical expense tax deduction.
Still, the potential impact of the SFC bill on older Americans goes beyond those provisions. To understand the implications of the SFC’s tax proposals for Americans 65+, the AARP Public Policy Institute asked the Institute for Tax and Economic Policy (ITEP) to analyze the tax bill as passed by the SFC using its microsimulation tax model. The results underscore the proposal’s potential negative long-term impact on older Americans.
Like the House tax bill, many taxpayers age 65+ get some tax relief under the SFC bill. But others end up paying higher income taxes than they pay today and the number doing so rises sharply over time. That impact is in addition to the potential negative effects of cuts to programs like Medicare that would result from the tax bill—effects that the analysis does not cover.
Overall, 20 percent of taxpayers 65+, totaling 6.3 million taxpayers, would either see no change or experience a tax increase in 2019 under the SFC tax bill. Among them, 1.2 million would get a tax hike and 5.1 million would see no change. About 29 percent of taxpayers 65+ with income below $65,150 (the income limit that captures 60 percent of all taxpayers), would see no tax change or a tax hike.
As a result of sunsetting the SFC’s middle-class tax cuts, the projected number of taxpayers 65+ experiencing a tax hike would jump more than four times in eight years from 1.2 million in 2019 to 5.2 million in 2027. Add the 5.6 million older Americans who would see no tax change in 2027, and the total number of taxpayers 65+ not receiving a tax cut rises to 10.8 million. As for taxpayers 65+ with incomes below $65,150, by 2027, 36 percent would either see no change in their income taxes or experience a tax increase compared to under current law.
The bottom line is that even today’s 65+ as well as those who turn 65 by 2027 who benefit initially may end up paying higher and ever increasing taxes soon thereafter. Further, as the result of growing deficits, they may receive reduced value from Medicare or other programs that are central to older Americans’ wellbeing.