The Senate is poised to pass its tax bill as soon as Friday and while it will mark a victory, it is not the end of the process. The bill still needs to be reconciled with the House-passed legislation, which differs in some significant ways from the Senate plan.
For months, Republican leaders of the “big six” working group held weekly meetings so that the tax plans that they unveiled would be largely unified, making it possible for legislation to sail through Congress before the end of the year. But the House and Senate proposals diverge on important provisions that will be challenging for lawmakers to rectify in the coming weeks, in part because of competing political priorities facing lawmakers in each chamber.
Republicans originally wanted to collapse the tax brackets to three, from seven, in part to achieve their goal of simplifying the tax code so that people could file on a postcard. That proved difficult. The House plan went with four brackets: 12 percent, 25 percent, 35 percent and a top rate that stays at 39.6 percent for millionaires.
The Senate bill sticks with seven brackets of 10 percent, 12 percent, 22.5 percent, 25 percent, 32.5 percent and 35 percent but lowers the top rate to 38.5 percent for high-income individuals and couples.
Perhaps the thorniest issue thus far has been the state and local tax deduction, which allows people to deduct their state and local income, sales and property taxes. The House bill limits the deduction to just property taxes and caps it at $10,000.
The Senate plan eliminates the so-called SALT deduction entirely, which could anger many upper-middle-class families and spook House members who have already objected to the more generous scaled-back version in their chamber.
But the Senate may well add that House property tax provision into its bill to satisfy Senator Susan Collins, Republican of Maine, who has said that it must be done before she commits to the bill. By the end of the day, the Senate may add in the $10,000 property tax deduction, which would go a long way to assuaging House lawmakers as well.
Republicans in the House would cap the deduction for mortgage interest debt at $500,000, down from the current cap of $1 million.
Senate Republicans have decided to leave the deduction alone. If that holds, it would be a big victory for real estate lobbyists, who have been vocal in their opposition to changing the deduction, but that could make the House bill even more expensive.
Reducing the corporate tax rate to 20 percent, from 35 percent, is at the center of both the House and the Senate tax plans. How soon they get there is the only difference. The House bill immediately cuts the corporate tax rate, fulfilling the wishes of President Trump.
The Senate imposes a one-year delay on lowering the rate, a move that allows Senate Republicans to preserve other deductions that the House eliminates. Economists have debated the effect that the delay will have on economic growth.
Now, the Senate is discussing whether to raise the rate above that 20 percent figure to help pay for other provisions or, possibly, to help defray the budget costs of the bill. Increasing the corporate tax rate would be a troublesome development for many Republicans and Mr. Trump, who have drawn a red line on a 20 percent corporate rate.
Republicans are united in their desire to give small businesses a tax break, but their plans differ in how to provide a tax cut. House lawmakers created a new 25 percent tax for so-called pass-through businesses — sole proprietorships, partnerships and S corporations that currently pay taxes at the individual rate of their owners. However, they erected guardrails to prevent the new rate from becoming a loophole that wealthy individuals can exploit by converting themselves into entities to take advantage of the 25 percent rate.
The Senate takes a different approach, creating a new deduction for pass-through businesses along with other incentives to promote investment. To satisfy the concerns of certain senators, including Ron Johnson of Wisconsin and Steve Daines of Montana, the deduction is expected to be increased to 23 percent from the current 17.4 percent in the bill.
A main priority of the Republican tax effort has been making the United States’ tax system more competitive so that companies invest here and so that they do not have an incentive to shift profits to lower-tax jurisdictions. The Senate plan will impose taxes on American and foreign companies that shift offshore money earned in the United States. There would be an effective minimum tax on money earned domestically and a 12.5 percent tax on foreign revenue from intellectual property.
The original House approach would have levied a 20 percent “excise tax” on payments between American and foreign companies that are affiliated with each other. This idea set off substantial confusion and opposition from drug and insurance lobbyists and was tweaked during the Ways and Means Committee’s amendment process.
To cut business and individual tax rates and double the standard deduction for individuals and families, Republicans had to do away with many popular tax credits and other prized deductions. The House initially eliminated a tax credit for adoptions but later restored it. The House repealed deductions for medical expenses and counted tuition wavers that are widely used by graduate students as taxable income.
In the Senate, Republicans also preserve the adoption tax credit. Unlike the House, they maintain the deduction for medical expenses and provide “education relief” for graduate students.
Almost all Republicans agree philosophically that the estate tax — or, as they call it, the death tax — is unfair. But repealing it is costly, and the tax tends to hit only the very wealthy (and their heirs). House Republicans decided in their bill to double the amount of inherited wealth that is exempt from the tax to $11 million, from $5.5 million, and phase out the tax after six years. In a late amendment, they moved to delay its full repeal another year, to 2025.
In the Senate, the exemption is also doubled, but the death tax never dies.