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Senate Passes Tax Bill Substitute, Sets Up Conference With House

Posted on December 4, 2017 by David van den Berg, Asha Glover, Dylan F. Moroses, Wesley Elmore

The Senate narrowly passed its version of the Tax Cuts and Jobs Act early December 2 on a 51-49 vote, moving the nearly $1.5 trillion package of tax cuts closer to the finish line and setting the stage for a conference committee with the House to reconcile key differences between the two chambers’ bills.

The Senate vote came after approval of a substitute amendment that would retain the alternative minimum tax and incorporate significant changes intended to smooth the bill’s passage. The final vote fell on party lines, with the exception of one GOP defector: Sen. Bob Corker, R-Tenn. Corker said in a statement that while he likes several provisions in the bill, he could not support the package because of concerns about its impact on the national debt.

“This landmark achievement is the culmination of months of hard work and cooperation among Finance Committee members; leaders from the Senate, House and administration; and the entire Senate Republican Conference,” Senate Finance Committee Chair Orrin G. Hatch, R-Utah, said following the vote. “It reflects a shared desire to produce a tax system that is pro-growth, pro-jobs, pro-family, and will move our country forward to meet the challenges and opportunities of the 21st century.”

The House is scheduled to vote late December 4 on going to conference with the Senate on the tax bill. Among the differences that will need to be worked out between the two chambers are differences in the top individual income tax rate and the number of individual income tax brackets; differences in the way passthroughs are taxed; and several differences in the timing and length of some tax cuts — particularly those for individuals, which would all expire after 2025 under the Senate bill.

Changes in Substitute Secure Some Votes

In addition to bridging the gap somewhat with the House bill on some provisions, the substitute amendment added several provisions designed to secure the votes of some Republican holdouts.

Among the most significant changes in the substitute amendment is retention of the individual and corporate AMT — both of which would have been repealed under the original bill. Under the amendment, the individual AMT exemption amounts and phaseout thresholds would be increased over current law, while the current-law corporate AMT would remain.

According to a Joint Committee on Taxation estimate, the AMT provisions would together raise $173.2 billion over 10 years, partially offsetting the cost of other changes to the bill. Overall, changes to the bill would bring the cost to $1.45 trillion over a decade. The original bill reported out of the Senate Finance Committee cost $1.41 trillion.

The substitute amendment also brings the Senate bill’s rates on the deemed repatriation of offshore accumulated earnings more closely in line with the House bill’s, setting those rates at 14.5 percent for earnings held as cash and 7.5 percent for other earnings.

That latter provision is specifically intended to offset the cost of a proposal pushed by Sens. Ron Johnson, R-Wis., and Steve Daines, R-Mont., to increase the deduction for passthroughs in the Senate bill from 17.4 percent to 23 percent. Accepting the House’s deemed repatriation plan will help bridge the gap between the bills, Johnson told reporters, explaining why that provision was chosen as the pay-for to boost the passthrough deduction.

Johnson acknowledged the considerable differences between the House and Senate bills in their treatment of passthrough entities. He said that while he doesn’t necessarily expect his passthrough provisions to survive a conference committee, he will have a seat at the table where he “can make the treatment actually better.”

Daines told Tax Analysts that the increased passthrough business deduction resolved his main concern of helping small businesses. “That was about $160 billion in additional tax relief that they’re going to see as a result of the changes we’ve made,” he said, adding that well over half of Montana’s private sector jobs come from passthrough entities.

Another change, pursued by Sen. Jeff Flake, R-Ariz., would phase out the provision allowing for 100 percent expensing rather than having it simply expire after 2022, as in the original Senate bill.

Flake said in a statement that his support for the bill hinged on the removal of the $85 billion “expensing budget gimmick” in the measure and a commitment from Senate leadership and the Trump administration to collaborate on a “growth-oriented legislative solution to enact fair and permanent protections” for recipients of the Deferred Action for Childhood Arrivals policy.

Sen. Susan M. Collins, R-Maine, also negotiated three changes to the bill. One would allow individuals a deduction of up to $10,000 for state and local property taxes, mirroring the House bill on that issue. The Senate bill had originally repealed the SALT deduction entirely.

The House bill, passed November 16, would partially repeal the SALT deduction for individuals. House lawmakers kept the Ways and Means Committee’s initial proposal to eliminate the federal deduction for state and local income and sales taxes for individuals, and preserve the itemized property tax deduction, capping it at $10,000.

A second change Collins pushed through would allow individuals to deduct medical expenses in 2017 and 2018 if the expenses exceed 7.5 percent of adjusted gross income. Under current law, those expenses could be deducted only if they exceed 10 percent of AGI.

Collins’s final change would reverse a provision in an earlier version of the bill to eliminate catch-up contributions to retirement accounts for church, charity, school and public employees, according to a statement she released.

During the so-called vote-a-rama before the vote on final passage, the Senate also approved an amendment offered by Sen. Ted Cruz, R-Texas, to expand the use of section 529 college savings plans to include elementary and secondary school expenses. The vote on that amendment was 51-50, with Vice President Mike Pence casting the deciding vote.

Democrats Rebuke Process

Before release of the substitute amendment, Democrats blasted a list of Republican amendments that were expected to be incorporated in it. Sen. Claire McCaskill, D-Mo., said on Twitter that Democrats received the list from lobbyists and not Republican lawmakers, calling it “disgusting’’ and predicting that Democrats would not be given time to read the amendments.

Sen. Jeff Merkley, D-Ore., complained on the Senate floor about the partnership between the Republicans and K Street, saying it was a “horrific way to do business.”

Senate Minority Leader Charles E. Schumer, D-N.Y., sharply criticized GOP leadership over the bill’s gestation process, saying, “They’re still writing it by hand mere hours before voting on it. Is this really how Republicans are going to rewrite the tax code?”

However, Finance Committee member Rob Portman, R-Ohio, said on the Senate floor that all amendments were filed publicly.

An amendment by Toomey incorporated in the substitute amendment to exempt universities from an excise tax on their endowments if they refuse federal funding drew sharp criticism from Democrats on the Senate floor, some of whom argued that it would benefit only Hillsdale College in Michigan. McCaskill said that the family of Education Secretary Betsy DeVos is Hillsdale’s largest donor.

“It feels like this is a very limited provision written for a very special person,” McCaskill said. “What does it have to do with taking Title IV money as to whether or not your endowment is going to be taxed?”

In response, Toomey argued that his proposal is fair and that “several” other colleges also decline Title IV money.

Ultimately, the Senate voted 52-48 in favor of an amendment by Merkley to remove the Toomey provision from the bill.

Many other amendments — most of them offered by Democrats — were voted down during the vote-a-rama. One Republican amendment offered by Sens. Marco Rubio, R-Fla., and Mike Lee, R-Utah, which would have made the child tax credit refundable and pay for it with an increase in the proposed 20 percent corporate tax rate, had been expected to pull in Democratic support. However, it was soundly defeated, with a motion to waive a budget point of order against the amendment falling on a 29-71 vote.

Paige Jones contributed to this article.

Follow David van den Berg (@TAtaxDavidVDB), Dylan F. Moroses (@DMoroses3244), and Asha Glover (@AshaSGlover) on Twitter for real-time updates.