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W&M Approves Significant Changes to Tax Bill, Sets Up Floor Vote

Posted on November 10, 2017 by David van den Berg

The House Ways and Means Committee concluded its four-day markup of the Tax Cuts and Jobs Act (H.R. 1) November 9, passing the bill on a party-line vote after also approving a manager’s amendment that would increase the proposed tax rate on repatriated corporate income, lower the tax rate on some passthroughs, and make other significant changes to the underlying bill.

The bill will likely be considered by the full House the week of November 13, just as the Senate Finance Committee begins its markup of markedly different tax legislation.

“We know we have more work yet to be done,” Ways and Means Chair Kevin Brady, R-Texas, told reporters after the committee vote. “But this is an historic step, and we look forward to sending this bill to the House and ultimately to the president’s desk this year.”

Manager’s Amendment

Brady said his manager’s amendment would make the measure compliant with the reconciliation instructions included in the fiscal 2018 budget resolution that allow for a $1.5 trillion tax cut. A preliminary Joint Committee on Taxation score of the Brady amendment appears to back that up, estimating that the bill as amended would increase the deficit by $1.44 trillion. The JCT had estimated that the previous manager’s amendment approved by the committee on November 6 would have cost $1.57 trillion.

“I think most people realize that the first manager's amendment really caused us to break through the cap,” Ways and Means member Carlos Curbelo, R-Fla., said after the vote. “And now we’re back.”

Curbelo said he didn’t think there was any single provision in the amendment that brought the legislation back into compliance with reconciliation rules. “All these things work in concert,” he said. “All of these decisions are tough. And we know what all the items on the menu were, and we chose the other ones where we had consensus in the committee.”

Among the changes in the amendment is the introduction of a new 9 percent tax rate for some passthrough income. According to a summary of the amendment, the 9 percent rate would be in lieu of the ordinary 12 percent rate and would apply to “the first $75,000 in net business taxable income of an active owner or shareholder earning less than $150,000 in taxable income through a passthrough business.” The benefit of the 9 percent rate would phase out for income above $150,000 and would be fully phased out at $225,000. The 9 percent rate also would be phased in over five years, so would not be fully in effect until 2022. The changes would cost $60.8 billion over 10 years, according to the JCT.

Those changes were enough to win back support for the House tax bill from the National Federation of Independent Business, which had denounced H.R. 1 when originally introduced. “We are very grateful to Chairman Brady for listening to our concerns and working with NFIB to ensure that tax reform benefits the greatest possible number of American small business owners,” the organization said in a statement on the amendment. “This amendment would create substantial tax relief for millions of small business owners who were left out of the original bill.”

The change in the amendment generating the most revenue would require that some research or experimental expenditures be capitalized and amortized over a five-year period, or 15 years for expenditures attributable to research conducted outside the country, according to the summary. That provision would raise $108.6 billion over 10 years, the JCT said. The provision would take effect for tax years after 2023.

The amendment also would set the effective tax rate on deemed repatriated earnings at 14 percent for liquid assets and 7 percent for earnings held in illiquid assets — an increase over the 12 percent and 5 percent rates set in the original bill. That provision is estimated to raise $70.3 billion.

The amendment also would make changes to the proposed excise tax on some payments from domestic corporations to related foreign corporations. First, it eliminates the markup on deemed expenses, according to the committee summary. And second, the summary says, it “expands the foreign tax credit to apply to 80 percent of foreign taxes and refines the measurement of foreign taxes paid.” That refinement, according to the summary, is accomplished by referencing section 906 instead of a formula based on financial accounting information. Those changes would raise $87.6 billion.

The amendment also drops the 80 percent dividends received deduction to 65 percent and the 70 percent dividends received deduction to 50 percent, and maintains current-law effective tax rates on income from those dividends.

Brady’s amendment further provided an exclusion from the limit on net business interest deductibility for taxpayers that paid or accrued interest on what the summary terms “floor plan financing indebtedness.” That provision would appear to benefit businesses such as car dealerships.

“There’s a number of businesses that rely on borrowed money to inventory,” Rep. Mike Kelly, R-Pa., said after the vote. “And all that is is still allowing that to be completely deductible because it is an expense.”

Apart from business tax changes, Brady’s amendment would delay repeal of the estate tax until 2025 and allow all section 501(c)(3) organizations to engage in political speech, provided they do so in their normal course of business and only spend a small amount of money on it. That provision would sunset after 2023.

The amendment also would preserve the adoption tax credit rather than eliminate it, as proposed in the original bill. It also would require that Social Security numbers be provided for children when claiming the full expanded child tax credit. The deduction for moving expenses also would be preserved for military members who move because of military orders.

Like the bill itself, the committee approved the amendment on a 24-16 party-line vote.

Brady Clarifies Deduction for Passthroughs

Brady and Rep. Earl Blumenauer, D-Ore., also discussed an issue Blumenauer had raised earlier in the week — whether passthrough businesses would be allowed under the House bill to deduct their state and local income taxes. Under the bill, individuals would be able to deduct only up to $10,000 in state and local property taxes.

In a letter to Blumenauer, Brady said passthroughs won’t be able to deduct state and local income taxes, but that sales taxes imposed on and paid by a passthrough business and some property taxes related to business property would continue to be deductible.

Brady’s letter also pointed out that language from a recent JCT report (JCX-50-17) stating that state and local income, war profits, and excess profits taxes paid or accrued, “other than those paid or accrued in carrying on a trade or business or an activity described in section 212” of the code, were no longer allowed as itemized deductions was erroneous. JCT Chief of Staff Thomas Barthold confirmed that and said the mistake will be corrected in the committee report.

“One of the concerns I had was the accuracy of the revenue estimate and whether or not there was an opportunity for the loophole here to be exploited,” Blumenauer said. He also said he gave Barthold and fellow committee members “a chain of communication” with tax law professors indicating a “possibility that this tax could be characterized at the entity level, imposed at the entity level, and provide a tax credit back, in effect allowing local or state action to take place that would allow people to, in effect, deduct this for their income tax purposes.”

The JCT has discussed the issue, Barthold said, and if it thinks that may happen, it will offer suggestions to address the situation.

This “is a very serious issue” that could have “grave consequences,” Blumenauer said, adding that there will be people working to take advantage of the system if the bill passes.

“I strongly disagree with that characterization, but we’ll continue that discussion,” Brady responded. He also downplayed the JCT’s error, saying, “This is one-third of a sentence, while their verbal answers have been right on target.”

Democratic Amendments Rejected

As had been the case over the previous days of the Ways and Means markup, the committee rejected several Democratic amendments on November 9. The defeated amendments would have preserved the phaseout of the wind energy production tax credit in current law, preserved the estate tax, created a domestic production tax deduction in excess of section 199, and allowed the committee to obtain President Trump’s income tax returns from 2007-2016 and his business returns.

Rep. Terri A. Sewell, D-Ala., also introduced and then withdrew an amendment to preserve and expand the historic tax credit.

Committee member Lloyd Doggett, D-Texas, summed up committee Democrats’ views on the bill, highlighting the bill’s benefits for wealthy taxpayers like the president by referencing Trump’s reported practice of having two scoops of ice cream while everyone else at dinner with him has just one.

“He gets the big bowl of ice cream and the American people — they end up getting to lick the bowl and pay for the ice cream,” Doggett said.

Wesley Elmore contributed to this article.

Follow David van den Berg on Twitter (@TAtaxDavidVDB) for real-time updates.