GOP offers little clarity on 401(k) plan in tax bill

WASHINGTON — House Republicans’ tax-overhaul bill will raise the amounts that American workers can contribute to their 401(k) retirement accounts, House Majority Leader Kevin McCarthy said Sunday — but he offered no answer on whether that involves pretax or after-tax savings plans.

Current law sets the limit of annual contributions that savers can make from their pretax income at $18,000, or $24,000 for workers over 50; those limits will increase slightly in 2018.

The answer carries important implications for the popularity — and the viability — of the tax bill that House leaders plan to release Wednesday. President Donald Trump pointed out the political risk of fiddling with the retirement plans in a Twitter message: “There will be NO change to your 401(k),” Trump said last

Monday. “This has always been a great and popular middle class tax break that works, and it stays!”

But House Republicans — scrambling for ways to raise revenue that would offset the deep tax-rate cuts they’ve proposed for businesses and individuals — haven’t embraced the red line Trump tried to set. And lobbyists who want to preserve the current system have heard that tax writers may set a cap as low as $2,400 on pretax contributions, while increasing the after-tax limits. The effect would be to increase workers’ upfront taxes on retirement savings.

Giant asset managers, including Vanguard Group and Fidelity Investments, fear that imposing such low limits on the tax-deferred savings plans would reduce the American public’s savings rate. As of June 30, 401(k) plans held an estimated $5.1 trillion.

McCarthy, R-Calif., did little to clear up the matter Sunday.

“We’re going to raise the amount you can put in” a 401(k), he said on Fox News’ Sunday Morning Futures program. He also said: “And if you can do it and not be taxed later on, there is a way to make Americans more self-insured, have greater resources.”

The phrase “not be taxed later on” suggests that Republicans are considering increasing after-tax contribution limits for so-called Roth 401(k) plans. Workers who use the Roth option pay taxes on their income before making the contributions to their accounts. Then they receive tax-free distributions in retirement.

“So the way we’ll look at the 401(k), we will protect it, we’ll expand the amount that you can invest, but we’ll also give you an option to actually not be taxed later in life, not to have that tax burden hovering over you in the future but actually have greater income in the future,” McCarthy said.

House leaders have yet to confirm any change for the pretax contributions. A spokesman for the House Ways and Means Committee referred to remarks that Chairman Kevin Brady made last week.

But when asked on Thursday to specify pretax or after-tax changes, Brady didn’t answer directly, saying only that “we’re still exploring the other ideas.” The Senate, which will be writing its own version of tax legislation, hasn’t made a final decision on retirement plans, Republican Sen. Rob Portman of Ohio said last week — though he said he anticipates the Senate’s bill will largely leave current tax breaks in place.

House tax writers have a powerful incentive to reduce workers’ pretax contributions while allowing them more tax-free retirement benefits later. Doing so would effectively pull forward tax revenue from the future, helping to lessen the overall cost of the tax bill.

The budget that the House and Senate have adopted allows for a tax cut of $1.5 trillion over 10 years, yet the framework that Trump and congressional leaders released last month would expand the deficit by $2.4 trillion, according to one independent estimate.

On Sunday, Portman and Susan Collins, R-Maine, both said they expect tax changes enacted by Congress will spur enough economic growth to boost revenue collections and reduce the deficit. “This is going to change behavior,” Portman said on NBC’s Meet the Press. “The question is, by how much.” Collins called that thinking “entirely realistic” on CBS’ Face the Nation.

“At the end of the day, this is going to be reducing the deficit because it’s going to get the economy moving,” said Portman, who serves on the Senate Finance Committee.

Portman, director of the White House Office of Management and Budget for about a year under President George W. Bush, said that raising annual U.S. economic growth to 2.3 percent from 1.9 percent would be enough to start lowering the deficit.

“So far I’m encouraged by discussions I’ve had with members of the Senate Finance Committee,” said Collins, who called for the tax code to be “simpler, fairer and more pro-growth.”

Collins expressed hope that the plan could gather some Democratic support, though Senate Republicans can pass their plan with a simple majority in the 100-vote chamber.

But the tensions over who will benefit were on display during an hourlong meeting last week when Trump met with Senate Finance Committee members. Democrats who attended, including many whose states Trump won, said the president agreed with every point raised on the subject of tax cuts for the middle class. At the end of the meeting, Sen. Ron Wyden, D-Ore., told Trump that the tax bill Republicans were drafting would not deliver on his promises to the middle class and would instead benefit corporations and high earners.

Trump looked at his top economic advisers, waved his hand, and said, “Take care of it,” Wyden said.

Democrats are already attacking the House legislation as a bait-and-switch in the hopes that they can find a path forward to a bipartisan tax bill that they believe will truly benefit middle-class Americans.

“This is a middle-class con job,” Wyden said.

Democrats hope that by killing the Republican bill, they can work with Trump to create bipartisan legislation that achieves a middle-class tax cut.

“There are areas where we can come together,” said Sen. Chuck Schumer, D-N.Y., the minority leader, “but there’s no way we can come together on raising taxes on the middle class. That’s the Achilles’ heel of their bill.”

Republicans are putting the middle class at the forefront of the discussion of their plan to pass the most sweeping rewrite of the tax code in a generation. Their primary claim is that cutting taxes on businesses, including reducing the top corporate tax rate to 20 percent from 35 percent, will generate large wage gains for U.S. workers.

Still, the gap between the budget’s guidance and the tax bill’s estimated cost may only be increasing.

On Saturday, Brady bowed to concerns from Republicans in high-tax states and said he’ll preserve an individual income-tax break for property taxes that had been targeted for elimination. That move, aimed at resolving an impasse between House leaders and roughly two dozen Republican lawmakers from states including New York and New Jersey, would create a new revenue hole of an estimated $430 billion over 10 years.

“This involves the future of my district for years,” said Rep. Peter King, a New York Republican whose district covers part of Long Island. King said on Fox’s Sunday Morning Futures that he’s “certainly not on board” at the moment. “I’m not going to sign onto anything until the full package is fully examined,” he said.

An estimate by the Tax Policy Center found that the Republican tax framework would reduce federal revenue by $2.4 trillion over a decade and by $3.2 trillion over the following 10 years.

“While the framework’s tax rate cuts would generate new economic activity at first, those growth effects would be washed out in a few years by the effects of higher budget deficits,” the non-partisan think tank said in a blog post on Friday.

House tax writers have a powerful incentive to reduce workers’ pretax contributions while allowing them more tax-free retirement benefits later. Doing so would effectively pull forward tax revenue from the future, helping to lessen the overall cost of the tax bill.