Congressional Republicans agreed to permanently cut corporate taxes and temporarily provide relief for individuals through 2025 in a comprehensive tax reform bill slated for House and Senate votes the week of December 18.
Republicans released their compromise tax package and related explanation of the Tax Cuts and Jobs Act (H.R. 1) on December 15, after days of negotiations to win support from the GOP’s 52 senators, some of whom fought for changes addressing child tax credits, small business taxes, and the federal budget deficit.
“The Tax Cuts and Jobs Act is now only two votes and a signature away from becoming the law of the land,” House Speaker Paul D. Ryan, R-Wis., said following the release of the conference committee report.
The Joint Committee on Taxation estimate shows the legislation would lose $1.46 trillion over the next decade, but GOP aides said the JCT is not likely to complete distributional tables until just before lawmakers vote on the bill. Republicans said in a summary that the bill would give a $2,059 tax cut to a family of four with the median income of $73,000.
House Ways and Means Committee Chair Kevin Brady, R-Texas, didn’t identify specific revenue raisers for last-minute changes to the bill during a press conference December 15. “It really was a combination of different adjustments in different areas, which we think is the most balanced way to do it,” he told reporters.
Immediate Corporate Rate Cut
The conference report would reduce the corporate tax rate to 21 percent effective January 1, 2018, and would repeal the corporate alternative minimum tax. It would also change the country’s current international tax system to territorial from worldwide and preserve the research credit.
Senate Finance Committee member Johnny Isakson, R-Ga., praised the legislation for overhauling the country’s corporate tax system “by lowering rates and adopting new international tax rules similar to our trading partners.”
For passthrough businesses, the measure would provide a 20 percent deduction that applies to the first $315,000 of joint income earned by S corporations, partnerships, limited liability companies, and sole proprietorships. Businesses in those categories with income above that level would generally be eligible for a deduction of up to 20 percent on business profits, reducing their effective marginal tax rate to a maximum of 29.6 percent, according to the summary.
Senate Finance Committee member Rob Portman, R-Ohio, said the final bill is more like the Senate’s version than the House’s, highlighting the treatment of passthrough businesses as an example. “The structure is a little closer to the Senate version because we kept our provisions for these passthroughs, which was viewed as simpler,” Portman said.
The conference report also follows the Senate legislation in its treatment of section 179expensing. Taxpayers under current law can choose under section 179 to deduct the cost of qualifying property rather than recover it through depreciation deductions. The Senate called for increasing the maximum amount a taxpayer can expense under section 179 to $1 million and increasing the phaseout threshold to $2.5 million. Those amounts are indexed for inflation for tax years starting after 2018.
Another area where the conference report hewed closely to the Senate’s approach was on private activity bonds, retaining their tax-preferred status. The House had proposed making the interest paid on qualified private activity bonds includible in a taxpayer’s gross income. The definition of qualified private activity bonds includes exempt facility bonds. Those facility bonds include bonds issued to finance airports, ports, and other transportation projects, schools, and more.
The conference agreement rejected a House provision that eliminated the inflation adjustment of the wind energy production tax credits, which would have reduced the value from about 2.4 cents per kilowatt-hour to the base amount of 1.5 cents per kilowatt-hour, and changed how the beginning of construction was calculated.
Based on a ruling from the Senate parliamentarian, lawmakers were unable to include language that would allow churches and charities to engage in political activity.
Most individual provisions in the bill are temporary, scheduled to expire at the end of 2025.
The tax package would maintain seven individual income tax brackets: 10 percent for individuals making up to $9,525 and married couples making up to $19,050; 12 percent for individuals making up to $38,700 and couples making up to $77,400; 22 percent for individuals making up to $82,500 and couples making up to $165,000; 24 percent for individuals making up to $157,000 and couples earning up to $315,000; 32 percent for individuals making up to $200,000 and couples making up to $400,000; 35 percent for individuals making up to $500,000 and couples making up to $600,000; and 37 percent would apply to individuals making more than $500,000 and couples making more than $600,000
The bill would nearly double the standard deduction to $12,000 and $24,000 for individuals and married couples, respectively. The deduction for state and local taxes would be limited to $10,000, but taxpayers could split the write-off between property tax and either sales or income tax.
The child tax credit would be doubled to $2,000, and the bill makes $1,400 of that amount fully refundable. The credit would require that children have social security numbers issued before the due date for filing the return for the tax year.
The bill temporarily provides a $500 nonrefundable credit for qualifying dependents other than qualifying children. That credit begins to phaseout for individuals/families making over $200,000/$400,000 and is not indexed for inflation.
Sen. Marco Rubio, R-Fla., said increasing the refundable portion of the child tax credit swayed him to support the bill. The provision was added to secure the votes needed to pass the bill in the Senate, House Ways and Means Committee member Kristi L. Noem, R-S.D., told reporters after signing the conference committee report. Rubio said December 14 that he would not support the bill unless changes were made to expand the child tax credit.
The child and dependent care tax credit and the adoption tax credit were not changed by the legislation. However, the mortgage interest deduction will change for new homebuyers after December 31, 2017, and before January 1, 2026. For buyers of first and second homes, the deduction will be capped at $750,000 for couples and $375,000 for individuals.
Interest on home equity loans will no longer be deductible for tax years 2018 through 2025.
The bill would allow medical expenses to be deductible up to 7.5 percent of adjusted gross income for 2017 and 2018, before returning to the 10 percent in current law. The legislation also repeals the Affordable Care Act’s individual mandate beginning after December 31, 2018.
Parents will be able to use section 529 plans to save for elementary, secondary, and higher education, while graduate students would continue to be able to exempt the value of reduced tuition from their taxes.
The bill also would double the estate tax exemption to $10.98 million, adjusted for inflation after December 1, 2019. However, it would revert to current law after eight years, said Noem, who expressed dismay that negotiators were unable to repeal the estate tax.
Senate to Move First, House Tees Up
The Senate is expected to take up H.R. 1 before the House does, Rep. Don Young, R-Alaska., said after signing the conference report for the measure. Brady said the exact timing of the vote would be left up to Ryan and Senate Majority Leader Mitch McConnell, R-Ky.
The House Rules Committee is scheduled to consider the tax reform package December 18, setting up the lower chamber for a floor vote after Senate passage.
Portman told reporters that he believes the bill has enough support to pass both chambers. Sen. Bob Corker, R-Tenn., who was the sole Republican to vote against the Senate’s version of the bill, said that he supports the bill, even though it is “far from perfect.”
Portman added that he expects Sens. John McCain, R-Ariz., and Thad Cochran, R-Miss., both of whom missed votes the week of December 11 because of illness, will be available to vote on the bill the week of December 18.
A potential Senate swing voter, Sen. Susan M. Collins, R-Maine, had not indicated how she would vote on the bill by press time. She told reporters the day before that she would wait to review the conference committee’s bill over the weekend before making a decision. However, she did put out a release Friday evening applauding the inclusion of several provisions she fought to include.
Dylan F. Moroses contributed to this article.
Follow Stephen K. Cooper (@ScoopOnTaxes), Asha Glover (@AshaSGlover), and David van den Berg (@TAtaxDavidVDB) on Twitter for real-time updates.