Lawmakers Move on Tax ReformNovember 22, 2017
On Nov. 16, efforts to rewrite the Federal Tax Code took significant steps forward when the House approved its version of a comprehensive tax reform legislation as well as the Senate Finance Committee approving a competing measure.
First, House Republicans pushed through their proposal – the Tax Cuts and Jobs Act (H.R. 1) – by a largely party-line vote of 227-205, with no Democratic support, and the loss of 13 Republicans. The bill as approved would lower the corporate tax rate to 20 percent and the rate for some income of pass-through entities to 25 percent; compress the individual rate brackets from seven to four; provide for business expensing; boost the individual standard deduction and the child tax credit; repeal the estate tax and the corporate and individual alternative minimum tax; and shift to a territorial-style system for taxing foreign-source income of U.S. multinationals. To read a section-by-section summary, please click here.
Just hours after H.R. 1 passed the House, the Senate Finance Committee approved its own version of the Tax Cuts and Jobs Act on a party-line vote of 14-12. Final passage came after a days-long mark-up and after a series of modifications that Committee Chairman Orrin Hatch (R-Utah), unveiled on Nov. 14 in an effort to ensure that the bill does not increase the federal deficit beyond the 10-year budget window – a requirement for legislation moving under fast-track budget reconciliation protections in the Senate.
The Senate measure, as introduced on Nov. 9, broadly follows the contours of the House-passed legislation. Similar to the House bill, the Finance Committee proposal would reduce the corporate tax rate to 20 percent; however the Finance proposal would delay implementation of the rate cut until 2019, while the House provision would be effective beginning in 2018. It would reduce marginal tax rates for individuals but does not follow the House in reducing the number of rate brackets. The Finance bill provides significant relief from the estate tax but stops short of the full repeal included in the House package. It proposes no changes to the current-law deduction for mortgage interest on home purchases which the House bill would cap at interest paid on loan amounts of up to $500,000; but it would fully repeal the deduction for state and local taxes – something the House bill would retain, although only for property taxes and even then subject to a cap.
However, the modifications to Hatch’s Chairman’s Mark include some significant new revenue offsets and proposals to pare back some of the tax relief provisions in the original measure, along with assorted proposals for new tax incentives.
Included in the Mark is a provision to repeal the individual mandate penalty on individuals who do not have adequate health insurance coverage, as enacted in the Affordable Care Act (ACA). This change – which is not part of the House-passed bill – is expected to raise $318 billion over 10 years, according to the Joint Committee on Taxation (JCT), as the foregone penalty income would be more than offset on the spending side by an expected reduction in federal payouts for premium assistance credits. The estimate assumes that some lower-income individuals who purchased insurance to avoid the penalty will decide to drop their coverage once the penalty is eliminated and therefore will no longer receive the federal subsidy payments.
Other changes to the Chairman’s Mark would:
- Sunset, after 2025, the changes to the individual side of the tax code in Hatch’s original Chairman’s Mark, including marginal rates, changes to credits and deductions, and the proposed doubling of the estate tax exemption. The individual tax relief proposals in the House bill are all permanent.
- Tweak some of the seven proposed individual rate brackets (ranging from 10 percent to 38.5 percent) and adjust the income thresholds at which those brackets would apply.
- Sunset the proposed new pass-through regime after 2025 and modify the 17.4 percent deduction for certain pass-through income – for example, by making it available to taxpayers with income from service partnerships whose taxable incomes are under $500,000 (for married-joint filers). Again, the House proposes permanent pass-through tax relief.
- Strike proposed changes to the rules affecting the tax treatment of nonqualified deferred compensation.
- Require certain research and experimentation (R&E) costs to be amortized over five years (15 if the research is performed outside the U.S.) and clarify that specified R&E expenditures subject to capitalization and amortization include software development.
The JCT estimates that the Hatch’s modified Mark would increase the federal deficit by just over $1.4 trillion between 2018 and 2027 – down from its estimate of nearly $1.5 trillion over the same period for the proposal as originally introduced. The recently approved unified budget resolution for fiscal year 2018 affords fast-track budget reconciliation protections to a tax bill that increases the federal deficit on net by up to $1.5 trillion over 10 years.
The Senate is expected to consider floor amendments to the Finance Committee-approved tax reform bill during the week of Nov. 27, following Congress’s Thanksgiving holiday recess week. Once the Senate has approved its tax reform bill, the two chambers must reconcile differences between the two bills and then vote to pass a final bill in identical form before tax reform legislation can be signed into law by President Donald Trump.