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Senate GOP Tax Reform Plan Increases Brackets, Keeps Credits

Posted on November 10, 2017 by Asha Glover, Stephen K. Cooper, Dylan F. Moroses

Senate taxwriters’ long-awaited tax reform proposal includes more individual tax brackets and several other major differences from the House GOP tax reform bill that likely will have to be reconciled during a conference committee.

According to a summary and a Joint Committee on Taxation description released by the Senate Finance Committee on November 9, the upper chamber’s bill would establish seven income tax brackets: 10 percent, 12 percent, 22.5 percent, 25 percent, 32.5 percent, 35 percent, and 38.5 percent. The House’s version of the Tax Cuts and Jobs Act (H.R. 1) proposes only five brackets. The Senate bill also would expand the child tax credit to $1,650, preserve the adoption tax credit and the deduction for medical expenses, and double the estate tax exemption.

The Finance Committee said it will begin marking up the bill on November 13. It describes the description released by the JCT as a “conceptual mark,” while actual legislative text will not be released until after the markup.

The Senate and House also differ on the home mortgage interest deduction, with the Senate chair’s mark protecting the deduction for existing mortgages and newly purchased homes up to $1 million, and the House bill providing the deduction on new mortgages of up to $500,000.

The chair’s mark does not include changes to carried interest or the Affordable Care Act’s individual mandate.

Like the House plan, the Senate proposal would lower the corporate income tax rate to 20 percent, but with a one-year delay. The Senate also proposes almost doubling the standard deduction from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples. Other proposals include maintaining the deduction for charitable contributions and repealing the alternative minimum tax.

On the business side, the Senate bill allows for full expensing. The Senate proposal’s “variety of offsets” include repealing the current section 199 deduction and implementing a net operating loss limit rule to raise revenues to lower the corporate rate to 20 percent, a Finance Committee aide said. Another offset would deal with interest in much the same fashion as the House rules, the aide said, adding that a “big chunk of revenue is coming out of interest limitation.”

An aide noted that lawmakers still need to address restrictions imposed by the Byrd rule. A JCT score of the bill estimated that it would cost $1.5 trillion over 10 years.

While corporate integration is not addressed in the Senate bill, Finance Committee Chair Orrin G. Hatch, R-Utah, is still considering it, an aide said. “It’s still a possibility; it’s a priority for him. But I will tell you that bringing the rate down to 20 percent takes some pressure off of that issue. . . . We’re going to assess that as we move forward,” the aide said.

Another Finance Committee aide pushed back against Democrats’ complaints that the legislation was drawn up behind closed doors. “This is not an exercise that was done in a few weeks; this is an exercise that’s been in the making for years,” he said. The committee has held more than 70 tax reform hearings in five years, and the bill is a product of working groups, hearings, and bipartisan tax reform efforts, he added.

Corporate Rate Cuts

The Trump administration supports both versions of the corporate rate cuts offered by congressional GOP taxwriters, Office of Management and Budget Director Mick Mulvaney said November 9 on Bloomberg TV.

Both tax proposals meet the guidelines laid out in the Republican “Big Six” unified tax reform framework, Mulvaney said.

Mulvaney said the administration sees the benefit of immediately dropping the corporate rate to 20 percent under the House proposal, but also supports the Senate plan to delay the rate cut until 2019.

The delay would spur more economic activity in 2018 because businesses would push for more investment in 2018 “so they can take a write-off at that higher 35 percent rate” the following year, Mulvaney said. “That’s a very compelling argument,” he said.

Congressional Republicans hope to pass tax reform before the end of 2017, but they also must approve a spending bill to fund the government beyond December 8. Mulvaney said the White House would like to see Congress fund the government through the fiscal year ending in September 2018.

Thune Previews Base Erosion

Before the release of the Finance Committee’s conceptual mark, committee member John Thune, R-S.D., said the upper chamber’s tax bill will take “a slightly different approach” from the House legislation to combat multinational corporations moving their headquarters overseas.

“We’ve got to have some rules in place, even with a 20 percent [corporate] rate, to make sure that we avoid some of the base erosion that would come with it,” Thune told Tax Analysts. “It’s different than the excise tax that was employed in the House, but [it puts] adequate measures in place to prevent base erosion and some of the temptation to earnings strip,” he added. “Multinationals, American corporations, even foreign companies with U.S. subsidiaries will look at this approach and find it more to their liking.”

Thune also predicted the Finance Committee will follow the same approach as the House when the upper chamber begins its markup by encapsulating member concerns about pieces of the legislation into a chair’s amendment.

Finance member Patrick J. Toomey, R-Pa., spoke to some of those senators’ concerns during a conference call with reporters in which he made the case for including repeal of the ACA’s individual mandate in the bill. Noting the Senate reconciliation rules that prevent legislation from adding to the budget deficit outside a 10-year window, Toomey said that “if we include individual mandate repeal, that is a terrific solution to address this very hard challenge.” The Congressional Budget Office estimated the previous day that repealing the mandate would raise $338 billion over 10 years.

Toomey added that senators are “still working through some details” on whether some parts of the bill could be permanent, suggesting that the corporate rate will be kept at 20 percent without expiration. “I’d also like to see the international structure we have in place without expiration,” he said. “That’s my goal.”

Dems’ Child Tax Credit Proposal

As Finance Committee Republicans scrambled to unveil their tax proposal, committee Democrats Sherrod Brown of Ohio and Michael F. Bennet of Colorado suggested that congressional GOP policy is at odds with President Trump’s calls for middle-class tax relief and pitched an idea that Trump reportedly liked.

The American Family Act of 2017 (S. 2018), introduced by Brown and Bennet in October, would raise the current child tax credit to $3,600, make it entirely refundable, and administer payments monthly. However, Bennet suggested that its inclusion in the Senate GOP tax bill would not be enough to win Democratic support, or to help working families.

“Even if Republicans include the largest child tax credit increase they are considering, it would not be fully refundable, preventing it from helping working families and larger families,” Bennet said during a press conference. Brown said he has mentioned the child tax credit proposal three times to Trump, who suggested “he liked the idea all three times I brought it up,” he said.

Brown said he considers the closed-door process Republicans have taken to develop their proposal “pretty outrageous” and unprecedented, highlighting the disconnect between Republicans in the White House and Congress. “It appears to me the president is still saying a lot of the right things, but it doesn’t appear that” Senate Majority Leader Mitch McConnell, R-Ky., or House Speaker Paul D. Ryan, R-Wis., are listening, Brown said at the press conference.

Follow Asha Glover (@AshaSGlover), Dylan F. Moroses (@DMoroses3244), and Stephen K. Cooper (@ScoopOnTaxes) on Twitter for real-time updates.