House Republicans Draw Lines as Tax Bill Moves to Senate

House Republicans Draw Lines as Tax Bill Moves to Senate

BNA Snapshot

• Senate set to vote after Thanksgiving
• Differences, including state tax deduction, yet to be resolved

This Article has been reproduced with permission from Tax Management Weekly Report, 36 TMWR 1412 (November 20, 2017). Copyright 2017 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>

By Kaustuv Basu, Colleen Murphy, and Laura Davison

House Republicans appeared triumphant after the passage of a tax reform bill, but some members were already preparing for long negotiations with the Senate in December to hammer out the final version of the measure.

Republican leaders in the House are bracing to defend their favorite aspects of the tax bill even as the Senate moves ahead with its own version.

Thirteen Republicans voted against the House tax bill (H.R. 1), which passed on a 227-205 vote Nov. 16. But more GOP lawmakers could oppose a version that emerges from a House-Senate conference if the compromise bill doesn’t contain the key provisions House leaders have promised.

Ways and Means Committee Chairman Kevin Brady (R-Texas) told reporters after the vote that he wanted to improve the treatment of international taxation and address concerns around the state and local tax deduction.

Many Ways and Means Republicans said they were still waiting to see what ends up in a final version of the bill. Rep. Peter Roskam (R-Ill.) said there was momentum behind the tax bill. “I think it is going to be easier than most people think,” Roskam said about reconciling the differences between the tax bills from the two chambers. (For a road map of where to find key provisions and compare the House tax reform bill (H.R. 1) with the Finance Committee version, read Bloomberg Tax’s analysis.)

Cuts and More Cuts

The House and Senate plans are at odds about the timing of corporate and individual tax cuts. The Senate plan would delay cutting the corporate tax rate to 20% until 2019, while the House bill would make that change in 2018. The Senate bill would also sunset the tax cuts for individuals and passthroughs in 2026.

The Senate proposal is less generous in some respects, calling for a full repeal of the state and local tax (SALT) deduction and also a doubling of the estate tax exemption amount so it applies to fewer people. The House bill would repeal the estate tax after 2024.

House leaders also would shrink the SALT deduction to a $10,000, for property taxes only. An ultimate bill that limited the SALT deduction even further would risk losing support from high-tax-state Republicans, including Reps. Tom Reed (R-N.Y.) or Tom MacArthur (R-N.J.), who voted for the bill on the condition that a property tax compromise would be included.

Ours and Theirs

Rep. Mark Meadows (R-N.C.), chairman of the ultra-conservative House Freedom Caucus, said the repeal of the SALT deduction and the method of taxation of passthrough businesses would be the two thorniest issues when the bill goes to conference committee in December.

Meadows said he likes the treatment of international taxation in the Senate plan better than the House version, but prefers the House treatment of passthroughs.

The Senate proposal breaks one of the “red lines” the caucus laid out for any tax bill, Meadows said. It doesn’t provide a 25% rate for passthroughs, but instead would give passthrough owners a 17.4% deduction on passthrough income, which would be taken out of non-wage income and subjected to the individual income tax rate corresponding with their income. The bill’s top individual rate is 38.5%.

The House bill would set a 25% maximum rate on the portion of passthrough net income distributions treated as business income.

“Getting the passthrough rate right is as critical, if not more critical, than getting the corporate rate right,” Meadows said.

Meadows said he is talking with Sen. Ron Johnson (R-Wis.), who also opposes the Senate’s passthrough approach, about alternatives.

Required Permanence

Rep. James B. Renacci (R-Ohio) said he is concerned that the Senate plan doesn’t do enough to ensure the tax cuts for individuals and passthroughs have staying power. The proposal as it stands now would sunset them in 2026.

“I think we’re going to want to have permanency,” Renacci said. “It’s definitely something I would have to think about if it wasn’t permanent.”

A bill that calls for repealing the Affordable Care Act’s individual mandate would add “another layer of risk” for a conference bill to pass the House, MacArthur said.

“They can’t mess with the state and local property deduction,” he said. “They promised they won’t.”

‘Inside D.C.’ Rules

Reed said that while House Republicans have repeatedly called for permanent provisions, he doesn’t expect that to be in the final Senate measure. Members are handicapped because of “inside D.C.” rules, he said, referring to the Senate’s requirement that no filibuster-proof bill can pass if it adds to the deficit outside the 10-year window.

“I recognize there are likely going to be temporary provisions both on the individual and corporate side and we’ll have to deal with that,” he said. Reed said he expects future members to make temporary provisions permanent, a goal other members have repeated in recent days.

Most members should have learned from the health care debate that they must view the package as a whole instead of drawing red lines on specific provisions, said Rep. Matt Gaetz (R-Fla.), a member of the House Republican Study Committee.

“A lot of members got in a box on health care because they early on were willing to isolate specific provisions rather than look at the whole deal,” he told Bloomberg Tax. “There are elements of the Senate plan I like a little better than the House plan, there are elements of the House plan I like a little better than the Senate plan, I think most members feel that way.”

Corporate Concern

A bill that would change economic growth prospects—such as delaying the rate cuts or curbing full expensing—would be problematic, Rep. David Schweikert (R-Ariz.) told Bloomberg Tax. He said he has yet to see data showing that economic growth could take off next year without the corporate tax delay.

“My fixation is that this really has to be about expanding economic opportunity. I stress over the delay of the corporate tax rate for one year,” Schweikert said.

Similar concerns were previously voiced by Rep. Pat Tiberi (R-Ohio), who said he prefers an immediate corporate tax rate cut to 20%.

To contact the reporters on this story: Colleen Murphy in Washington at cmurphy@bna.com; Kaustuv Basu in Washington at kbasu@bna.com; Laura Davison in Washington at lDavison@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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