WASHINGTON – Senate Republicans are forging their own path on the effort to overhaul the U.S. tax code, preparing a plan that would delay President Trump’s top business priority and blow up House Republicans’ carefully crafted compromise on state and local tax deductions.
GOP Senate leaders on Thursday plan to unveil legislation that would delay cutting the corporate tax rate from 35 percent to 20 percent until 2019, four people briefed on the planning said. That’s a major departure from Trump’s insistence on immediate tax cuts that he says are necessary to spur the economy.
The one-year delay would lower the cost of the tax bill by more than $100 billion, and negotiators are trying to preserve as much revenue as they can for other changes. But it could also delay decisions by companies to move back to the United States from overseas or prompt them to hold off on other decisions as they wait for the corporate rate to fall.
To try to prevent companies from waiting until 2019 to invest, Senate Republicans plan to allow companies to immediately deduct all capital investments in 2018, the people said.
Some Senate Republicans objected internally to the one year delay, but they were overruled.
The Senate approach is much different than that of House Republicans, who are advancing a bill that would lower the corporate tax rate in 2018. But the House leaders are also having problems with the total cost of their bill, which has ballooned beyond the $1.5 trillion price ceiling needed to get the bill through the Senate.
On Thursday, House Ways and Means Committee Chairman Kevin Brady, R-Texas, released new revisions to his tax plan mean to eliminate a $74 billion shortfall and address other issues to smooth the bill toward passage.
To offset the various revenue-losing provisions in the amendment, House tax writers opted to increase tax rates on foreign assets moved back to the United States by multinational corporations. The previous five percent tax on fixed assets would rise to seven percent, while a 12 percent tax on cash held abroad would jump to 14 percent.
The House revisions would also direct further benefits to middle-class taxpayers, including by restoring the Child Adoption Tax Credit left out of the previous version and a deduction for moving expenses available to active-duty military members.
Other changes in the House bill are directed at businesses, including a further rate reduction for certain qualified “pass-through” firms that send their earnings to their owners to be taxed as individual income.
Treasury Secretary Steven Mnuchin said in a Bloomberg interview Wednesday that the White House’s “strong preference” would be for the tax cut to go into effect next year, but the White House is not expected to threaten to block the bill over this change, those briefed on the planning said.
There are other notable differences between the Senate and House bills.
In a break from the House plan, which kept the top marginal income tax rate at the current 39.6 percent, the Senate bill would slightly lower it to 38.5 percent – a win for advocates of supply-side economic theory who believe that a lower top rate will increase investment.
The Senate plan would also keep the mortgage interest deduction largely intact, capped at the current level of $1 million, according to a Republican official who spoke on the condition of anonymity because the official was not authorized to speak publicly. In the House bill, people would only be allowed to deduct interest payments on their first $500,000 worth of home loans, a proposal that generated fierce opposition from the housing industry.
The Senate plan would also eliminate a provision that allows people to deduct state and local taxes on their federal tax returns. This change would raise around $1 trillion in revenue over 10 years and help Republicans offset other components of their tax bill, such as the lower tax rates they plan to pursue for businesses and individuals.
But it would also disproportionately affect residents of high-tax states like New York, New Jersey, California and Illinois – complicating House Republicans’ efforts to unite members behind their plan.
House tax legislation authors initially planned to entirely eliminate the state and local deduction in their tax bill, but after GOP lawmakers from such states revolted, a compromise was reached. The current House bill would now allow taxpayers to deduct up to $10,000 in property taxes but no longer allow state income tax deductions – a deal that was able to win over lawmakers from high-tax districts.
The Senate has very few GOP members from states with high state and local taxes, as such states tend to go Democratic in statewide elections.
The proposal to eliminate that deduction in the Senate bill would only apply to individuals and families, whereas businesses would still be allowed to deduct state and local taxes, as these would be protected as a business expense. Such a difference could further inflame Democrats, who have criticized the GOP tax cut effort as offering too many benefits for companies and stripping benefits away from individuals and families.
Among other differences, the Senate bill will retain seven income brackets for families, while the House bill proposes collapsing the existing seven brackets down to four.
The Senate bill would also continue allowing people to claim a tax credit for adopting children, to deduct payments on student loan interest and to deduct some medical expenses – a provision dropped from the House plan that could lead to significantly higher taxes for many households, particularly for the elderly.
Another revision to the House bill that Brady released Thursday appears to dramatically change the rules on what sort of political activities a tax-exempt nonprofit organization may engage in. Language that applied only to religious organizations, giving them a freer hand to speak out on political campaigns, was broadened in the new amendment to include all 501(c) (3) organizations.
The new Senate measure brings the broad GOP tax cut effort into sharper focus. Republicans are trying to rush a tax bill into law with little debate because they want to prove to voters they can deliver on major campaign promises before the end of the year.
They have also said a giant tax cut bill will spur more economic growth, add jobs and boost wages.
But the proposed tax plans would also slash a number of tax breaks used by families and businesses and – according to numerous estimates – add at least $1.5 trillion to the federal debt, which could create a drag on economic growth.
The House bill would immediately cut the corporate tax rate to 20 percent, offer families a five-year “flexibility credit” of $300 per parent, and expand the child tax credit. It would also collapse the seven income tax brackets paid by families and individuals down to four brackets, only taxing income above $1 million at the highest rate of 39.6 percent.
The House and Senate must pass matching bills before they can send the measure to President Donald Trump to sign into law.
Republicans control 52 votes in the 100-seat Senate, meaning they can only lose two members if they want to pass a bill without Democratic support. A 50-50 tie would go to Republicans, as Vice President Pence would cast the tiebreaking vote.
It’s because of that delicate majority that many White House officials expect a tax bill – if it eventually becomes law – to more closely resemble the Senate bill. Senate Republicans will work to resolve differences among themselves in the next few weeks, but major changes made in the House could upend any agreement.
Senate lawmakers also must grapple with strict rules that regulate how a tax-cut bill is designed. To avoid a filibuster from Democrats, Republicans must write a bill that does not add more than $1.5 trillion to the debt over 10 years.
Republicans, such as Sens. Bob Corker, Tenn., Jeff Flake, Ariz., and James Lankford, Okla., have said they would not support a tax plan that adds too much to the debt, creating a bloc of votes that would be able to kill the bill if they aren’t appeased.