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Senate Tax Bill Delays Corporate Tax Cut Trump Called Essential
Senate Tax Plan Diverges From House Version, Highlighting Political Pressures
(about 3 hours later)
WASHINGTON — Senate Republicans will unveil their version of a sweeping tax bill on Thursday that delays the corporate tax cut President Trump has called essential to a tax rewrite yet is more attuned to the middle class than a competing plan moving through the House.
WASHINGTON — Senate Republicans outlined their vision on Thursday for overhauling the tax code, proposing a one-year delay in President Trump’s top priority of cutting the corporate tax rate while reinstating some prized tax breaks used by middle-class families.
The bill set for introduction in the Senate Finance Committee restores several popular tax breaks that were eliminated in the House bill, which passed the Ways and Means Committee along party lines on Thursday afternoon.
The Senate bill differs significantly from the House version approved by the Ways and Means committee on Thursday: It would preserve some popular tax breaks, including ones for mortgage interest, medical expenses and adoption costs, and would maintain a bottom tax rate of 10 percent for lower earners. But it would also jettison the state and local tax deduction entirely and delay the enforcement of a 20 percent corporate tax rate until 2019, which could rankle the White House and mute the economic growth projections that Republicans are counting on to blunt the cost of the tax cuts.
Those include the deduction for mortgage interest debt, which the House had proposed to cap at $500,000 as well as tax breaks for the elderly and the blind and high out-of-pocket medical expenses. The Senate bill also allows graduate students in universities to keep a valuable deduction and preserves a tax credit for adoptive parents, which had been eliminated by the House but was added back in a committee amendment on Thursday afternoon.
The disparate bills show the competing pressures that Republican lawmakers are facing and the calculations that Senate and House leaders are making to ensure passage of the bills. While both bills share the main priorities of cutting corporate and individual taxes, they diverge on matters of high political sensitivity, particularly for vulnerable House Republicans from high-tax states and for Senate Republicans concerned about adding to the federal budget deficit.
The disparate bills show the competing political pressures facing Republican lawmakers and the calculations Senate and House leaders are making to ensure passage of the bills through their respective chambers. While both bills share the same main priorities of cutting corporate and individual taxes, they diverge on matters of high political sensitivity, particularly for vulnerable Republican House members from high-tax states.
Senate staff members said their draft would require changes, likely major ones, to survive procedural rules that allow it to pass on a party-line vote. Those changes could include setting some of the tax cuts to expire after a period of years.
The starkest example is the state and local tax deduction, with the Senate completely eliminating the valuable tax break. The House bill scales it back but would still allow individuals to deduct property taxes up to $10,000. Republicans from New York and New Jersey have already rejected that limitation as too strict and the Senate’s complete elimination could spook some House members, who will have little power to change the final product once the bill passes through the House.
A retiring senator, Jeff Flake, Republican of Arizona, raised concerns that the legislation could add more to federal deficits. “I remain concerned over how the current tax reform proposals will grow the already staggering national debt,” Mr. Flake said, “by opting for short-term fixes while ignoring long-term problems for taxpayers and the economy.”
Another pain point is the Senate Republican plan to cut the corporate rate to 20 percent from 35 percent but delay implementation until 2019. Such a move would help Republicans stay within the cost confines of the bill but could mute the economic growth projections that the White House and lawmakers have been counting on to avoid adding to the federal deficit.
Senators Mike Lee, Republican of Utah, and Marco Rubio, Republican of Florida, said the bill did not go far enough in increasing the child tax credit, which rose to $1,650 per child in the Senate version, from $1,600 in the House bill. “The Senate is not going to pass a bill that isn’t clearly pro-family,” they said in a joint statement, “so we look forward to working with our colleagues to get there.”
The Senate bill maintains a 10 percent bottom tax bracket for individuals — the House bill had raised it to 12 percent — and, like the House bill, would nearly double the standard deduction for individual filers. The Senate version includes seven income brackets, scuttling some of the simplicity that House drafters used to sell their bill, which reduced the number of brackets to four.
Stocks tumbled on the news that the corporate rate cut may be delayed. The Standard & Poor’s 500-stock index fell 0.4 percent and the Nasdaq 100 slipped 0.5 percent. “The Street definitely felt like there was some connection between tax policy and the market reaction, which was pretty severe,” said Les Funtleyder, a portfolio manager at E Squared Capital Management in New York.
High earners would pay a top tax rate of 38.5 percent in the Senate plan, down from 39.6 percent, a rate that was maintained in the House bill.
FreedomWorks, a conservative advocacy group, called the Senate’s plan to delay the corporate tax cut “unacceptable.”
Meanwhile, in another dramatic departure from the House bill, the Senate would not create a special, lower top rate for so-called pass-through entities, which are businesses whose profits are distributed to their owners and taxed as individual income. Instead, the Senate would create a deduction for pass-through owners of all income levels, effectively lowering taxes both on rich owners and on middle-class small business owners who would not have benefited from the House’s original lower pass-through rate.
Still, several business groups and Republican leaders applauded the movement in both chambers. The influential National Federation of Independent Business, which represents small businesses and had opposed the House bill, reversed course and said it backed both an amended House bill and the Senate version. Other groups shook off the delayed rate cut and embraced the Senate plan.
Senate staff members said the bill will meet Republicans’ target of not losing more than $1.5 trillion in tax revenue over the course of a decade. But they suggested changes would be needed to be made by the Finance Committee in order to ensure it does not lose revenues after 10 years, and thus stays in compliance with the procedural rules that would allow the bill to pass on a party-line vote
“It’s been a week of remarkable progress,” said Michael A. Steel, a former House leadership aide who is a managing director for Hamilton Place Strategies, a consultancy in Washington.
Those changes could include setting some of the tax cuts to expire after a period of years.
Republican leaders expressed optimism that they could quickly address concerns and resolve the competing political pressures facing their lawmakers in the Senate and House.
The details emerged as Republican Senators planned to release their long-awaited tax bill, which lawmakers hope to send to Mr. Trump’s desk by Christmas.
“This will be met with Senate consternation and all kinds of things,” said Representative Peter Roskam of Illinois, who oversees the Ways and Means tax policy subcommittee. “But when it comes down to it, what we’re on the verge today is winning an argument — winning an argument about the future of our economy and what our worldview is.”
On Thursday, amid pushback from fellow Republican lawmakers, small businesses and other industry groups, Representative Kevin Brady, who chairs the Ways and Means Committee, unveiled a 29-page amendment making further revisions to the House’s tax plan. The amendment restores the adoption tax credit, which the House tax plan had planned to repeal. It also creates a new, lower tax rate for certain small business owners, a provision small business trade groups had been pushing for.
The bill set for introduction in the Senate Finance Committee includes seven income brackets, scuttling some of the simplicity that House drafters used to sell their bill, which reduced the number of brackets to four. It would keep the bottom tax bracket for individuals at 10 percent, which the House had raised to 12 percent, and would reduce the top rate for high earners to 38.5 percent, down from the current rate of 39.6 percent, which the House had maintained. Like the House bill, the Senate’s version plans to roughly double the standard deduction and expand the child tax credit.
The starkest example of the competing priorities is the state and local tax deduction, which is heavily used in high-tax states like New York, New Jersey and California, which are represented by Democrats in the Senate but have some Republican representatives in the House. The Senate completely eliminates the valuable tax break, which allows taxpayers to deduct state and local income, sales and property taxes. The House bill would still allow individuals to deduct property taxes up to $10,000. Some House Republicans have already rejected that limitation as too strict and the Senate’s complete elimination could further spook those members, whose political future could be imperiled if they pass a plan that actually increases their constituents’ tax bills.
“Every state should be a winner in tax reform, and in my opinion, that would not be the case if the Senate view were to prevail,” said Representative Leonard Lance, Republican of New Jersey. “I’m not voting for the $10,000, so I’m certainly not voting for zero,” Mr. Lance said.
Senate staff members said the bill would meet Republicans’ target of not losing more than $1.5 trillion in tax revenue over a decade. But they suggested that the Finance Committee would need to make changes to ensure it does not lose revenue after 10 years, and thus stays in compliance with the procedural rules that would allow the bill to pass on a party-line vote.
In another significant departure from the House bill, the Senate would not create a special, lower top rate for so-called pass-through entities, which are businesses whose profits are distributed to their owners and taxed as individual income. Instead, the Senate would create a deduction for pass-through owners of all income levels, effectively lowering taxes both on rich owners and on middle-class small-business owners who would not have benefited from the House’s original lower pass-through rate.
On Thursday, in the face of pushback from fellow Republican lawmakers, small businesses and other industry groups, Representative Kevin Brady of Texas, who leads the Ways and Means Committee, unveiled a 29-page amendment making further revisions to the House’s tax plan. The amendment restores the adoption tax credit, which the House tax plan had planned to repeal. It also creates a new, lower tax rate for certain business owners.
Under the new provision, the first $37,500 of business income would be taxed at 9 percent, rather than 12 percent, for an unmarried individual earning less than $75,000 through a pass-through business. For a married couple, the dollar amounts would be double.
Under the new provision, the first $37,500 of business income would be taxed at 9 percent, rather than 12 percent, for an unmarried individual earning less than $75,000 through a pass-through business. For a married couple, the dollar amounts would be double.
The Senate is also including a provision to prevent large multinational corporations from stashing profits overseas. The bill will propose a new business tax on American and foreign companies — effectively a minimum tax on their income earned in the United States — while also levying a 12.5 percent tax on income American companies receive overseas from their intellectual property. .
The Senate is also including a provision to prevent large multinational corporations from stashing profits overseas. The bill will propose a new business tax on American and foreign companies — effectively a minimum tax on their income earned in the United States — while also levying a 12.5 percent tax on income that American companies receive overseas from their intellectual property.
The minimum tax included in the Senate bill is a critical component of Republicans’ plans to overhaul how the tax code treats corporations, using both carrots and sticks. The plan will encourage domestic investment by lowering the corporate tax rate to 20 percent from 35 percent and will discourage companies from shifting money abroad by imposing the new tax. However, it remains to be seen whether the plan will have its intended effect: The Senate is expected to delay the corporate tax cut until 2019, according to a Republican senator and a lobbyist familiar with the plan who requested anonymity to discuss a plan that has not yet been released.
Preliminary estimates indicate the provision would raise more than $130 billion in tax revenue over 10 years to help offset revenue lost from rate cuts, committee staff members said. The original House approach, which would have levied a 20 percent “excise tax” on payments between American and foreign companies that are affiliated with each other, would have raised an estimated $155 billion in revenue.
Republicans in the finance committee have been meeting with staff members for weeks to craft the Senate bill. Democrats criticized their process even before the bill was released on Thursday.
“Not a single Democrat has had any input into this bill,” the Senate minority leader, Chuck Schumer of New York, said on the Senate floor. “It was constructed entirely behind closed doors by the majority party, who have no intention of negotiating with Democrats because they’ve locked themselves into a partisan process that only requires a majority vote. And they’re going to try to rush it through this chamber with reckless speed.”
The Senate plan will impose a tax on American and foreign companies that shift money earned in the United States offshore but will do it in a simpler way than a complex plan outlined in the House version, the aides said. “It levels the playing field” between domestic and multinational companies competing in the same markets, a committee aide said.
Preliminary estimates indicate it would raise more than $130 billion in tax revenue over 10 years to help offset revenues lost from rate cuts, committee staff members said. The original House approach, which would have levied a 20 percent “excise tax” on payments between American and foreign companies that are affiliated with each other, would have raised an estimated $155 billion in revenue.
The Senate approach would impose a minimum tax, of sorts, on the profits earned in the United States by multinational companies.
Under current law, companies can avoid taxation on those profits by shuttling them to affiliated companies abroad, in countries where the corporate income tax rate is lower than it is in the United States. For example, the American subsidiary of a country based in Ireland, where the corporate tax rate is well below the American rate, could make payments to the Irish company for the use of its intellectual property. Those payments would be deducted from the American subsidiary’s profits, for tax purposes in the United States.
The new approach would apply only to large multinationals that make a significant amount of payments to foreign affiliates. It would levy a 10 percent tax on the difference between a company’s actual tax liability and the liability it would have faced for the profits it instead moved offshore.
So, for example, if a company made $100 million in American profits, but paid $80 million to a foreign affiliate for intellectual property rights, it would start with a tax liability of $4 million. (That’s from paying the bill’s proposed corporate tax rate, 20 percent, on an overall profit of $20 million.) It would then face an additional $4 million tax on the profits it shifted offshore. (The $80 million in payments would be subject to a 10 percent rate, which equals $8 million. Subtract the $4 million already paid, and you get the extra $4 million liability.)
Senate Finance Committee staff called that approach “more surgical” than the House bill.
The House watered down its excise tax proposal this week after it came under fire from a host of business and conservative groups, including the American Forest and Paper Association and Americans for Prosperity, an arm of the Koch political network.
In the House, Republicans were still wrestling with a critical math problem on Thursday over a sizable revenue hole to fill. To avoid a Democratic filibuster, the tax legislation can add no more than $1.5 trillion to federal budget deficit over a decade, and the House bill appeared to exceed that limit because it cut federal revenue by about $1.57 trillion over a decade, according to an estimate earlier this week by the Joint Committee on Taxation.
