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How the House tax plan might affect innovation

November 09, 2017
By: Jason Rittenberg

From investment returns to education savings, R&D incentives and more, tax policy and innovation are inextricably linked. Not surprisingly, the U.S. House GOP’s tax plan, released last week and updated through a significant amendment on Monday, could have significant impacts on the innovation economy.

Current[1] proposals with implications for innovation include:

Venture Capital & Startups

  • Employees receiving stock options from private companies (e.g., startups) may defer income taxes for up to five years (via Rep. Kevin Brady’s amendment, per Axios).
  • The plan retains the Qualified Small Business Stock Rules, which can benefit investors and founders by limiting income tax payments on certain stocks held for at least five years (per the National Venture Capital Association).
  • Carried interest provisions, which allow fund managers to pay capital gains taxes on the “carry” portion of their fees, would be allowed so long as the carry period is at least three years — this is an extension over current law and the initial bill, which both require one year of holding (via Rep. Brady’s amendment, per CNBC).
  • Capital gains tax rates for long-term investments remain unchanged in the proposals (per Washington Post), but with the decrease in standard income tax rates, this means that households in the lowest income tiers (e.g., up to about $145,000 for married, filing jointly) will have a tax advantage for gains realized in less than a year — the opposite intention of the capital gains tax.

Research & Development

  • The tax reform plan would maintain the current R&D tax incentive (per NVCA).
  • The bill would not, however, continue the “orphan drug” tax credit on costs associated with the development of treatments for diseases affecting fewer than 200,000 people (per NPR).

Higher Education

  • The bill introduced a 1.4 percent excise tax on private university endowments worth, as updated by amendment, at least $250,000 per enrolled student (per New York Times); varying estimates predict about 50 institutions would be affected.
  • Several incentives for college affordability are eliminated (i.e. Lifetime Learning, Hope Scholarship student loan interest deduction, and employer tuition reimbursement) in the proposal (per TIME).
  • Tuition waivers for graduate students would be taxed as regular income by the bill. Not all institutions currently treat these waivers as completely tax free and instead provide only a $5,250 deduction, but for institutions that do treat their waivers as non-taxable benefits, the income and tax implications for their graduate students are potentially severe.

Challenges of assessing tax reform

While much of the messaging and coverage of the House proposal emphasizes the “cut” portion of the bill, the full proposal also reforms many tax structures, complicating overall assessments. The core question is how will corporations, investors and individuals react to having a (possibly) lower tax bill without needing to take as many specific actions?

The college affordability changes are a key example of this: people will lose access to specialized deductions but may gain a larger standard deduction. How this change ultimately affects college enrollment largely comes down to how many students enroll or graduate because of these benefits — and whether they will continue to make the connection between their taxes and higher education if their filings no longer make that connection explicit.

The complexity of assessing a tax bill makes a good-versus-bad assessment of the plan challenging. NVCA has praised the plan, while the Association of American Universities expressed opposition to the endowment tax and the American Association of State Colleges and Universities said the plan would make education less affordable (see TIME for AAU and AASCU).

Next Steps

The House is proceeding toward a vote on the tax bill. The Senate released its proposal this morning that includes several significant differences from the House plan, which may complicate the negotiation process should both measures pass their respective chambers. Leaders in the House and Senate are still publicly committed to advancing a tax bill by the end of the year.




[1] Current as of 11:50 p.m. Eastern on Wednesday, November 9, 2017. 

 

tax rules, r&d tax credits