Senate Passes Tax Reform BillDecember 6, 2017
On Dec. 2, the Senate voted almost entirely along party lines—51 to 49—to approve its version of the Tax Cuts and Jobs Act (H.R. 1), but not before Republican leaders made some significant modifications to garner support from some wavering Republican Senators.
Congressional Republicans opted to move tax reform legislation under budget reconciliation protections, which allow for passage in the Senate by a simple majority vote rather than the three-fifths supermajority normally required to clear procedural hurdles in that chamber, making it a particularly useful tool for Republicans, who control only 52 Senate seats and who did not expect – and did not receive – any Democratic support.
Following approval in the Senate Finance Committee, it was unclear whether Republican leadership would have enough votes to secure the minimum needed for floor passage, as several lawmakers expressed concerns on a range of issues such as the treatment of pass-through entities, the proposed repeal of the individual mandate under the Patient Protection and Affordable Care Act, and the measure’s long-term impact on the federal deficit. That led to an intense period of negotiations, and ultimately changes to the final version.
The revised bill would expand some tax benefits included in the Finance Committee legislation and add provisions that were not in the Finance package. Some of the most notable changes would:
- Increase the deduction for pass-through business income to 23 percent (from 17.4 percent in the Finance Committee proposal). This change was made to win support from Sens. Ron Johnson (R-Wis.) and Steve Daines (R-Mont.), who had been increasingly vocal about what they viewed as the inequitable treatment of pass-through entities in the Finance bill as compared to the rate reductions being provided to corporations.
- Incorporate a House bill provision allowing taxpayers to deduct up to $10,000 in state and local property taxes but repealing the deduction for state and local income taxes. (The Finance Committee bill called for repealing the deduction for state and local income, sales, and property taxes alike.) This provision received especially strong backing from Sen. Susan Collins (R-Maine).
- Permit a deduction in 2017 and 2018 for medical expenses exceeding 7.5 percent of adjusted gross income (AGI) – another Sen. Collins-backed provision. The current-law deduction is generally only for unreimbursed medical expenses in excess of 10 percent of AGI (7.5 percent for those age 65 or above).
- Retain current-law rules for domestic international sales corporations (DISCs). These would have been repealed under the Finance Committee bill.
- Modify the 100 percent expensing provision to phase down write-offs for business investments after 2022 rather than allowing the provision to immediately sunset.
On the revenue side, the revised bill includes provisions that, among other things, would:
- Retain the corporate alternative minimum tax (AMT) and a modified version of the individual AMT. (The Finance-passed bill would have repealed the AMT for individuals and corporations.)
- Increase the deemed repatriation tax rates to 7.49 percent for noncash assets and 14.49 percent for cash and cash-equivalents (up from 5 percent and 10 percent, respectively, in the Finance Committee bill and slightly higher than the 7 percent and 14 percent rates, respectively, included in the House-passed version).
- Sunset the suspension of the overall limitation on itemized deductions after 2024 rather than 2025 as proposed in the Finance Committee bill.
The revised bill does not appear to include provisions that directly address concerns raised by Sen. Bob Corker (R-Tenn.) and Sen. Jeff Flake (Ariz.) about long-term deficit effects. Deficit issues threatened to upend progress on the Senate bill after the Joint Committee on Taxation (JCT) released a “dynamic” revenue score which estimated that the economic growth effects of tax reform would boost federal revenues by only $407.5 billion on a net basis between 2018 and 2027, reducing the bill’s net impact on the federal deficit over the 10-year budget window to just over $1 trillion, compared to $1.4 trillion for the same period under the JCT’s conventional “static” scoring method and $1.45 trillion under a preliminary static estimate released by the Congressional Budget Office.
The Senate-approved measure must now be reconciled with a competing version of the legislation approved in the House on Nov. 16. Thus far, the House has named their conferees: Ways and Means Chairman Kevin Brady (R-Texas), Energy and Commerce Chairman Greg Walden (R-Ore.), Natural Resources Chairman Rob Bishop (R-Utah), Devin Nunes (R-Calif.), Peter Roskam (R-Ill.), Budget Chairwoman Diane Black (R-Tenn.), Kristi Noem (R-S.D.), Don Young (R-Alaska) and John Shimkus (R-Ill.). The Democratic conferees include: Ways and Means ranking member Richard Neal (D-Mass.), Sandy Levin (D-Mich.), Lloyd Doggett (D-Texas), Raúl Grijalva (D-Ariz.) and Kathy Castor (D-Fla.).
For NSBA members, meaningful tax reform is a coherent set of reforms designed to promote economic growth, reduce complexity, and reduce administrative costs, increase parity and transparency and voluntary compliance in an equitable manner. In general, NSBA believes that the Senate passed version contains the appropriate elements for a positive and constructive reform of our tax code—one that takes steps toward reducing the complexity of the tax system for businesses of all types while maintaining strong incentives for growth. However, we still have some specific and significant concerns that need to be addressed as lawmakers reach a compromise and move towards a final legislative package.