By Richard Rubin 

WASHINGTON -- House Republicans now want to make a cut in investment taxes retroactive to Jan. 1, arguing that reducing rates will spur immediate growth.

The tax cut is part of a rewrite of the Affordable Care Act being considered in the House this week. An earlier version made the cut applicable in 2018, but not before.

Republicans say that retroactively repealing a 3.8% investment tax on individuals would boost business confidence. They say the 2017 repeal date would encourage investors to avoid waiting to make decisions. Without the change, some people would sit on unrealized gains for months as they wait for the capital-gains rate to go lower.

Critics said the approach isn't fair because it provides a windfall to high-income taxpayers who received income from investments they sold months ago.

"This is really critical for the economy," said Rep. Kevin Brady (R., Texas), chairman of the House Ways and Means Committee. "The sooner we can send a signal that those burdens are off you, job creator, the better."

The proposal, released late Monday with other changes to the GOP health-care plan, would accelerate the end of the 3.8% net investment income tax, a levy created in the 2010 health law and implemented in 2013. The previous Republican plan called for repealing the tax in 2018. The tax applies to capital gains, dividends, interest and other passive income.

"They could have made it retroactive to today's date because you're clearly not going to change anybody's behavior between Jan. 1 and March 20," said Leonard Burman, a Treasury official under President Bill Clinton who is now a fellow at the Urban Institute. "It's a revenue loss to the Treasury that produces no economic benefit. It's actually pretty bad policy."

The health bill is scheduled for a House vote Thursday. It must still get through the Senate, which is slated to consider the measure next week. "That sounds like an improvement to me," Sen. Pat Toomey (R., Penn.) said of the change. If the Senate chooses to delay the effective date, it could free up money that could be used elsewhere in the health bill.

Democrats criticized the accelerated tax cut and said its inclusion in the health bill revealed Republicans' priorities.

"We need a tax code that is simpler, fairer, provides economic certainty, and ensures that everyone pays their fair share," said Rep. Linda Sanchez (D., Calif.) "I don't see how a retroactive tax break for Wall Street is going to help Main Street families."

The net investment income tax only applies to individuals with incomes exceeding $200,000 and married couples with incomes over $250,000. Even within that group, capital income is highly concentrated and most of the benefits of the tax cut would go to households with incomes exceeding $1 million, according to the nonpartisan congressional Joint Committee on Taxation.

As Republicans debated a 2018 repeal, high-income investors had plenty of reasons to wait to realize capital gains, including potential cuts in capital-gains rates in the major tax bill to follow. Under the health bill under consideration, the highest capital-gains rate would drop to 20% from 23.8%.

Now, the House decision could unlock some of those profits.

"With the market as high as it is, perhaps you would get a sudden gush of money," said Mark Bloomfield, president of the American Council for Capital Formation, a Washington group that argues for lower capital taxation.

The House proposal would also accelerate other tax cuts in the health bill, including a 0.9% levy on wages above $200,000 for individuals and $250,000 for married couples. Industrywide fees on pharmaceuticals and health insurance would also go away. The so-called Cadillac tax on high-cost health insurance plans would start in 2026, one year later than in the previous GOP plan.

Capital gains are particularly sensitive to effective dates, because the wealthiest taxpayers who don't need cash right away can choose when to realize income. Past experience with capital-gains rate changes shows taxpayers are particularly sensitive in timing their asset sales to get favorable tax treatment.

For example, before the top long-term capital-gains rate jumped from 15% to 23.8% in 2013, taxpayers rushed to take advantage of the lower rates. Net capital gains increased by 65% from 2011 to 2012 and then dropped 22% in 2013.

The retroactive effective date is a break from past practice by Congress in cutting capital-gains rates. In 1997 and 2003, lawmakers announced effective dates during the legislative process. That approach didn't reward past decisions but didn't make people delay sales until the bill was signed or until the following year.

"The practices have taken into account the fact that people act," said George Yin, a former chief of staff of the Joint Committee on Taxation.

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

March 21, 2017 16:41 ET (20:41 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.