House Majority Leader Kevin McCarthy joined me this morning to discuss the House-Senate Conference Committee on tax reform:
HH: I am joined now by House Majority Leader Kevin McCarthy. Good morning, Leader, tough day in Southern California with these fires.
KM: I was just reading about with the winds down through Ventura, just devastating.
HH: Yeah. It’s a quarter block from Ventura City Hall, so we will keep our prayers on that. Let me turn to the Conference Committee, Mr. Leader. When does it get together? When does a bill get to the President’s desk? My concern always, I remember Jim Jeffords switching parties. I remember tragedies like Senator Heinz’ plane going down. I don’t like waiting around. I want to get this bill done.
KM: You know, I don’t like waiting at all, either, and that’s a very good point. That’s why Congress was scheduled to come in session today. We made sure decisively that we would come earlier just so we can vote to go to conference. So we voted last night. The House is moving now into conference. The Senate will take that vote as well, and we’ll start working out whatever differences we have between the two bills. They’re not a great difference, because they both wrote to the same number, like the architecture or the structure of the building is the same. The internal parts and some, so we’ll take what’s good from both, and I think we can get this done very shortly, definitely before Christmas.
HH: Let me begin with some of the big differences. The business interest deduction is eliminated in whole in the Senate, in part in the House bill, but that will cripple some businesses. It will destroy some businesses, actually. Is that on the table to revisit, Leader McCarthy?
KM: Yes, because you’ve got two differences. And you raise a very good point. What if you’re a business today? The tax code says you can do this, so you take a risk here, and you borrow more money, because the price of capital, and you expand. Well, you’ve made a business decision going forward, and others. You can’t change the course looking forward, but it can cripple the entire business. So that is why I think the House version is much better on that. I think those are the things we’ll look at.
HH: I think, it could actually be improved, but you’ll need revenue. I just talked with Senator Inhofe. He offered an amendment which I call jokingly the Hewitt Amendment, because the idea was first aired here, allowing people to withdraw 25% of their retirement assets for a 10% one-time tax, not ordinary income, no penalties, just 10%. It would add billions to the amount that you have to work with as you address the business interest deduction, graduate students, etc. Have you heard about this, yet, because Senator Inhofe says it is on the table for the conference.
KM: Yeah, we have heard about that. Now there’s a couple of ways I look at it. You do have, you can still write and get, I know you need different revenues to write, to solve this, but as you change the levers on what you take, different revenues come in. But I always look to, and just my rule of thumb. I did not grow up with any money. I always believe you invest long term. I don’t want people, I have a personal opinion about taking any retirement money out. I always say do that the very last instance. But the reason why you look to somebody to do that, what is that need, solve that need going forward.
HH: Well, here’s why I would advocate it to you, Mr. Leader, not only because it would raise revenue, but everyone I have talked with retirement assets and mortgages would use their retirement assets to reduce their mortgages because of the change in HMI if given the opportunity. So it’s just a classification of revenue from one retirement source to another.
HH: It’s very easily fixed, and boy, would it produce the revenue you need. It really does work.
KM: Well, if you’re doing it for that basis, then that’s retirement planning.
KM: Lots of times, I find when people pull that out, they pull it out and they spend it on something else on an emotion of that time and not in a retirement planning.
HH: Oh, bad idea.
KM: Now we do, we move these types of taxes. We did during the hurricane. We’re moving that for the California fires in Northern California, because you find out somebody has their house burn down, they didn’t have insurance and others, allow them to utilize that money. Don’t penalize them, because it’s their own money to be able to use that resource as they need at that time.
HH: I guarantee, I’ve talked to so many people about this, and retirement planners, too, yesterday, that millions of Americans would move their retirement money and pay you a 10% fee, and the state taxes, if they could reduce their mortgages immediately, or buy real estate and other retirement investment which you can’t do easily. So I hope you will give that some consideration. I think it solves a lot of problems. But let’s talk about the graduate students. I have gotten so many emails from grad students, Mr. Leader. They don’t want to be taxed on their phantom income. What do you say to them?
KM: Well, I think this is an area we can look at, most definitely. But there’s different ways to solve it, right? What we’re saying today is if you’re a graduate student, and the university pays you, and what they did, they’ve got that tax preferred where they don’t have to pay on it, either the university can pay you more, real pay for what’s going through, or we can readdress this. This is one of the things we looked at to make in apples to apples. In the Senate, they didn’t do it, so it’s one of the things on the table as it comes back out. It’s not a great deal amount of money.
HH: All right.
KM: It’s something I want to make sure…
HH: I know.
KM: …especially in the math and science world that we encourage, don’t discourage.
HH: yeah, it’s a lot of noise for a very little money.
KM: Yeah, yeah.
HH: And a lot of harm for a very little money. Let me talk to you about something that’s really small, but angered me. Senator Democrats launched an attack on one college, Hillsdale College, on Friday night.
HH: And I think it violates the 1st Amendment to single them out. There was a category of six colleges that don’t take federal monies that weren’t going to get a surcharge on their interest income from their endowment. Those six colleges don’t take federal funds. And the Senators, Democrats Merkeley and others, attacked Hillsdale College, because it’s conservative. That is an un-Constitutional attack on an viewpoint, Leader McCarthy.
HH: It ought to be reversed.
KM: Exactly. This is an amendment that Toomey brought forward to make sure foundations weren’t taxed at levels, especially if you weren’t taking any federal money. He did get it raised up the dollar amount, so it will not affect that area. But really, if you’re attacking somebody based upon their beliefs, that is, to me, un-Constitutional.
HH: It is, and I just hope it goes. The death tax is another area of difference between House and Senate. How are you going to bridge that gap?
KM: Well, I think we’ll find common ground, because in the House, what we do is we double the exemption, and then later as a couple years go, we exempt it altogether, because it’s double taxation. I’ve watched so many families that someone passes away, and they have to sell part of whatever asset they have just to move forward to pay the tax. In the Senate, we’ve only gotten 45 votes at the highest to eliminate the estate tax. Whichever way we go, we know we’re starting out with the exemption going up to 11. So that’s higher. So we’re in a better position to start with, and we’ll figure out which way we find…and remember, all of this is going to have to be in a conference together, and you’re not weighing it in its single self, but overall, everything. And you have to stay within that dollar figure of $1.5 [trillion]. So that includes where you’re going on rates, that includes what you’re doing with the graduate students, and everything combined together.
HH: I’ve got to explain that for the Steelers fans, Mr. Leader, which means that a trillion and a half dollar deficit on paper, it’s not dynamically scored, we actually don’t think it’s going to raise deficits, it has to be the verdict of the CBO at the end of this. So for every benefit you grant, you’ve got to either raise revenue or take another benefit away. That’s why I like my 10% tax on retirement shifting from…
KM: Because it adds money in there.
HH: …savings to real estate. Yeah.
KM: And the only thing, it’s not the CBO on taxes. It’s Join Tax.
HH: Oh, Joint Tax. Excuse me.
HH: Let me ask you about the number of brackets. I had Chairman Black on earlier, and she said look, this is one on which the House is going to dig in its heels. It doesn’t like cliffs. What does the leader of the House Republicans say?
KM: Well, the number of brackets, we have four, they have seven. And we’re trying to simplify it. So I think the fewer the brackets, the better off we are. What the most important thing I look at, though, is where are those rates on these brackets, and where are those income levels? And I’d prioritize the rate, the income level, and then the number of brackets.
HH: All right, and the last big difference between the two of you have to do with whether or not the home mortgage interest deduction changes. Now I don’t mind if you change if it you go to my idea and let people pay them off.
HH: But if you do not let people pay them off, gosh, where is the middle ground on that one?
KM: Well, I think it should be higher. The Senate has a million. And the House has $500,000. And let me be very, very clear. We do not take away the home deduction, okay, the interest deduction, because I see that on the internet. Somebody sent me something last night. That is, you get to continue to write off your interest on your home. And if you have one higher, right now, it’s at a million dollars, you’re grandfathered in. Now when we look at price of homes in different parts of the country, different levels get reached. The Senate keeps it at a million. The House is at $500,000. I’m advocating that the House come up on that level. And I think we can make that happen, follow through.
HH: Oh, very good.
KM: …because in California, it’s more expensive. It’s going to be a lot more than a place in Iowa, which might not affect anybody. But in California, it is. And you’re going to find the income level to start into a home, someone’s going to get punished from that basis. So if we bring it up higher, it would be in a better situation. And remember overall, so if you lower the brackets, and the Senate has a lower top bracket than the House. I actually would like to do, go lower than both of those. If we could take…
HH: Do you realize…
KM: If we could take the rates down lower, I’m opposed to every punishing somebody for being successful, because that really gets to people able to keep more of what they earn, and you incentivize and have greater growth, especially for a state that is a SALT. So SALT is the state and local taxes. So we have in there, both have a plan of $10,000 deducted for your taxes on your home.
HH: Property taxes, yeah.
KM: I actually would like to say it’s $10,000 for your income or your home, because if you do that, there’s some places that don’t have a high tax, but you’re missing out on that write-off, because of your living in California. Take that full amount. We eliminate the alternative minimum tax. Now in the Senate, they do not.
HH: It’s got to go.
KM: And…it’s got to go.
HH: That’s got to go.
KM: And I brought that up, and the Wall Street Journal agrees.
HH: That’s got to go.
KM: In business and individual…but if you look at an average home, and you go through in one of these income levels, say somebody’s making $150, maybe $200,000 dollars, they’re paying roughly about $17,000 dollars in SALT and they’re getting that deduction. But they’re paying somewhere about $5,600 in alternative minimum tax.
KM: If you eliminate that, that’s worth about $20,000 dollars.
HH: I agree.
KM: So you still are getting that. In the House version, we do that. The Senate version lets you have the home interest higher, and I think we could find, and we should raise that for California. We have…
HH: One more…
KM: Go ahead.
HH: One more question, Mr. Leader, and I’ll close by saying again, my proposal on allowing the change from retirement would fix all this, but I want to close by asking can we get this done next week? I really think it needs to be done next week for the markets. There’s no reason that we can’t giddy up here.
KM: Well, I think it could be done very quickly. I’m not going to put a timeline, and I know every person here on both sides of the aisle wants it done as fast, exactly for what you said. You never know what’s out there. You never know what’s going to happen to an individual. And I don’t think the differences are that great, and I think we all know where we can end up. So the sooner, the better. I’d like, let’s just work through the weekend and make this happen.
HH: Amen to that. Leader McCarthy, thank you for joining me. Please go look at the Hewitt Amendment.
KM: I’m going to.
HH: It will solve all of your problems.
HH: It will solve all of your problems.
HH: Be well.
End of interview.