Trump, GOP appear open to 401(k) changes in tax bill

Potential changes to 401(k) accounts appeared to get new life on Wednesday, with a key GOP chairman declining to rule out their inclusion in tax legislation and President Trump leaving room for negotiation. 

Trump on Monday seemed to take a hard line against changing the rules for retirement plans, tweeting that “there will be NO change to your 401(k).”

But on Wednesday morning, House Ways and Means Committee Chairman Kevin Brady (R-Texas) — the lead drafter of the tax-reform bill — didn’t give a definitive answer when asked whether changes to 401(k)s were still being considered.

He said lawmakers are exploring ways to further encourage retirement savings.

“We think in tax reform, you can create incentives for Americans to save more and save sooner, which can help them,” he said at a breakfast hosted by the Christian Science Monitor.

Meanwhile, Trump appeared to soften his position, saying that 401(k) changes are still on the table “and maybe we’ll use it as negotiating.”

The president stressed that he values 401(k)s.

“401(k)s, to me, are very important,” he said. “And they’re important because that’s one of the great benefits to the middle class.”

Financial industry stakeholders last week said they were hearing that Republicans were considering significantly limiting the amount that people could put into 401(k) plans on a pretax basis.

The current annual cap for most people is $18,000, but lobbyists had heard that the limit could be reduced to $2,400. Amounts over the $2,400 cap could be put into “Roth” accounts where the money is taxed when it’s deposited but not when it’s taken out.

A change in the cap on pretax 401(k) contributions could provide an offset to help pay for reducing tax rates. But the financial industry warns the policy change could reduce the amount that people save for retirement. 

Democrats have blasted Republicans for potentially considering lowering the cap. And not all Republicans have signaled that they would be on board with such a change.

“I think it was a way to try to pump up the revenue, which is important to try to get tax reform done, but I think it would have resulted in fewer people having access to retirement plans,” Sen. Rob Portman (R-Ohio) said on CNBC Wednesday morning.

Portman called Trump’s tweet shooting down the idea of 401(k) changes his “favorite tweet of the year probably.”

The discussion over changes to 401(k)s is part of a broader debate among Republicans about how to raise revenue to pay for cuts to individual tax rates.

Another possible way to cover the costs of those cuts that has been a source of considerable debate is the repeal of the state and local tax deduction (SALT). The tax framework Republicans released last month calls for doing away with the deduction, but GOP lawmakers in high-tax states such as New York and New Jersey balked, warning it is important to their constituents.

House Republican leaders are seeking to preserve elements of the state and local tax deduction to address the concerns of their members.

Brady said Wednesday he expects a compromise on the tax break would be announced before the text of the legislation is unveiled next week.

Republicans from high-tax states have floated several different accommodations on SALT.

One option would be to focus on keeping a tax benefit for state and local property taxes. Currently, taxpayers can deduct their state and local property taxes as well as either their income taxes or sales taxes. 

Rep. Chris Collins (R-N.Y.) has suggested giving taxpayers the option of either being able to deduct their property taxes or their mortgage interest.

Brady on Wednesday noted that lawmakers have floated ideas about keeping a tax break for property taxes, and he appeared to be sympathetic to the push.

“I think the frustration locally is that that’s really not based on anyone’s ability to pay,” he said leaving a meeting of Ways and Means Committee Republicans on the tax bill. “Property taxes just are painful, whether it’s young families or seniors who have paid off their mortgage.” 

Another idea that has been floated is to impose an income cap on the deduction so that the benefit is only curbed for high earners — for example, those making more than $400,000 annually.

Additionally, Rep. Tom Reed (R-N.Y.) has suggested converting the SALT deduction to a tax credit.

“I think that has some merit because you can really target that relief to the hard-working folks,” he said.

Reed, a Ways and Means Committee member, said he’s open to a number of solutions that takes care of “99 percent of people.”

Whatever the compromise is, it’s likely to raise less revenue than full repeal of SALT. The Tax Foundation estimated that allowing the deduction only for those making under $400,000 would only raise about one quarter of the revenue that would be generated by completely eliminating the break.

A compromise on the issue may not win over every GOP lawmaker from a high-tax state, but House leadership is hoping to win over as many members as they can to ensure their tax bill passes. 

They also want to ensure that Thursday’s budget vote goes according to plan. The House is slated to vote on the Senate’s budget resolution, which would unlock a budgetary procedure allowing Republicans to pass a tax bill through the upper chamber with a simple majority.

Blue-state Republicans will be divided on their votes on the budget, and have varying degrees of openness to a compromise on SALT.

Reed said he plans to vote for the budget. But Rep. Leonard Lance (R-N.J.) voted no on the House’s budget measure several weeks ago and said Wednesday that he will vote against the Senate’s resolution.

When asked about his preferred solution on state and local taxes, Lance replied, “My solution is to take [repeal] off the table.”