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The most controversial parts of the House's tax plan

Ethan Wolff-Mann
Senior Writer

The House Republicans’ new tax plan released by Rep. Kevin Brady (R-TX) proposes bold changes for tax reform — changes that have already been received with outrage by many groups.

The bill, called the “Tax Cuts and Jobs Act,” puts forward extensive tax cuts for businesses, but many people are hazy on whether their own taxes would go up or down, given the complexity of deductions. A tax bill is about much more than rates.

A number of industries and the small business lobby have come out against the bill, and the bill faces headwinds in both parties. Though lawmakers would like to serve a unified bill to President Donald Trump’s desk by the end of the year, less than two months remain to iron out quite a lot.

Here’s what still needs to be sorted out:

State and local tax deduction

In states that levy higher taxes, people can currently deduct them from their taxes. The new plan would put an end to that, something that would add substantial revenue, but would slam the residents of those — largely blue — states.

“I think state and local (SALT) deduction could be the most problematic,” Tom Block, Washington Policy Strategist at Fundstrat who worked in both houses of Congress, told Yahoo Finance.

With 34 House Republicans from these high-tax states, Block said they can only afford to lose 22 seats to keep the House. “I don’t see how a Rep from these states can vote for a provision that is so locally harmful,” said Block. “Seems to be inviting competitive races.”

Mortgage interest deduction

The mortgage interest deduction, currently capped at loans below $1 million, stands to be cut in half to $500,000. While the mortgage interest deduction has harsh critics on both sides — it’s only available to homeowners, not renters — this is a political lightning rod and the real estate industry will lobby hard against these changes.

“The housing complex from banks to appliance manufacturers to realtors and furniture-makers may be among the strongest lobbies in D.C.,” said Block.

Medical and student debt deduction

Another change that will not be welcomed by consumers is the repeal of deductions for medical and student debt payments. Medical debt is often a literal insult to injury, and the country is struggling with a student debt crisis as college becomes more and more expensive.

Currently, a person is allowed to deduct from their taxes the amount of medical costs minus 10% of their income. So, if you spend 11% of your adjusted gross income on medical expenses, you can deduct 1%. This can potentially be a big deal: Travel expenses to medical treatments are included, as insurance payments, so long as it’s paid with after-tax income.

For student debt, a person is allowed to deduct up to $2,500 of loan interest every year.

Estate tax repeal

The estate tax taxes estates above $5.3 million, and as such only applies to the wealthiest families in the U.S. In practice, this applies to just 0.2% of estates every year. While often painted as a penalty on family businesses, this will be painted as a gift to the wealthy, paid for in part by repealing deductions for medical and student debt and alimony payments.

Pass-through business income

Small businesses are often taxed through their owner’s personal income. These “pass-through” businesses will see a maximum tax rate of 25%, but certain service industries (a very broad category) would have to provide documentation, according to the Tax Foundation.

The National Federation of Independent Businesses, a key part of the small business lobby, said the “bill leaves too many small businesses behind.” and that it is “concerned that the pass-through provision does not help most small businesses.”

Promising passage

The bill’s future, however, is largely positive for Republicans, analysts think. Not everything may survive the mark-up process or the bill’s trip to the Senate, but the bill will likely arrive on time at Trump’s desk at 1600 Pennsylvania Ave.

“Republicans desperately need a victory,” said Block. “So, I remain very positive on the Republican leadership finding a pathway to passage.”

Ethan Wolff-Mann is a writer at Yahoo Finance. Follow him on Twitter @ewolffmann. Confidential tip line: emann[at]oath[.com].

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