House and Senate Tax Bills Advance
Week of Nov. 13:
- HOUSE: Rules Comm. and Floor action; House passage of tax bill likely.
- SENATE: Finance Committee marking-up Senate version, with consideration of amendments to begin Nov. 14.
- See below for key differences between House and Senate versions.
Last Week’s Action: On Thursday, Nov. 9, House Ways & Means Committee approved a modified version of their tax bill, while Senate Finance Chairman Hatch unveiled a Senate version with significant differences from the House version.
House Ways & Means Committee Republicans approved their tax bill on a party-line 24-16 vote. Prior to passage, committee Republicans approved a package of last minute changes to the bill to address concerns of small businesses and reduce the net cost of the bill to the $1.5 trillion limit in the Budget Resolution.
The modifications include provisions to:
- Lower the pass-through tax rate for small businesses to a low 9 percent rate (phased in over 5 years) for pass-through entities on their first $75,000 in net business taxable income (after pressure from small business advocates);
- Increase the repatriation tax on corporate profits held abroad to 14 percent for cash and 7 percent for illiquid assets;
- Restore the adoption tax credit;
- Increase the new tax on private university endowments;
- Require business research expenses to be amortized over 5 years; and
- Allow all non-profits, not just churches, to engage in political activity.
Ways & Means Committee did not add repeal of the Obamacare individual mandate to the House tax bill as the Administration had requested (and continues to push for).
While the Ways & Means Committee was completing action on its version of tax bill, Senate Finance Committee Chairman Hatch unveiled the Senate GOP version:
- Senate Finance Committee Chairman’s Mark [released Nov. 9]
- JCT Revenue Estimates of Chairman’s Mark [released Nov. 9]
Key differences from the Ways & Means bill:
- Delays the corporate rate cut one year to 2019 (although Administration has been adamant about lowering the rate in 2018);
- Lowers the top individual rate to 38.5% (fueling assertions that the bill favors the rich);
- Seven tax brackets: 10 percent, 12 percent, 22.5 percent, 25 percent, 32.5 percent, 35 percent and 38.5 percent;
- Pass-Throughs: while the House bill would tax pass-throughs at a general rate of 25 percent, with an additional low rate for business owners making less than $75,000, the Senate bill would reduce the rate for pass-through businesses by allowing them a 17.4 percent deduction, equivalent to a top rate of about 32 percent;
- While the House bill would repeal most of the state and local tax deduction but retain a limited deduction for property taxes, the Senate bill would scrap the entire deduction;
- Like the House, moves to a “territorial” tax system generally aimed at shielding offshore corporate income from U.S. taxation, but unlike the House bill, does not impose an excise tax on a portion of foreign subsidiaries’ profits (the House excise tax is aimed at discouraging off-shoring of profits);
- Increases the child tax credit from $1,000 to $1,650 and makes it available for families making as much as $1 million, and creates a new $500 credit for other dependents (compared to $300 in the House bill);
- Retains deductions for student loan interest and medical expenses;
- Instead of repealing the estate tax, doubles the exemption to $22 million for a married couple; and
- Maintains mortgage interest deductibility up to the current $1 million cap (after protests from the real estate industry).
TAX CUTS REDUCE CHANCES OF INFRASTRUCTURE INVESTMENT:
- By raising the public debt $1.5 trillion to finance corporate and individual rate reductions, enactment of the tax bill significantly lessens the chances that any significant public investment will be made in infrastructure.
- In addition, both tax bills cut back on tax preferences that could have incentivized infrastructure investment.
- A $1.5 trillion public investment in infrastructure would be a more direct and certain way to create domestic jobs, than either of the proposed tax bills.
OUTLOOK FOR ENACTMENT:
- Slim margins: As they are not seeking any Democratic support, the House GOP, with their 239-194 majority, can afford to lose only 22 votes. The Senate GOP, with their slim 52-48 majority, can afford to lose only 2 votes, and the uncertain health of Sen. Thad Cochran could place his vote at risk. In addition, Senators Flake and Corker have raised concerns about the $1.5 trillion debt increase to finance the tax cuts, and Sen. McCain has raised similar concerns in the past. If repeal of the ACA individual mandate is added to the tax bill, the support of Senators Collins and Murkowski could be in question.
- Senate’s Byrd Rule: The bill could run into procedural trouble in the Senate where the Byrd rule prohibits any revenue losses beyond the 10-year budget window–the effect of which is to require that tax cuts expire after 10 years unless fully paid for by that time.
- Push-back from Supporters of Current Deductions/Credits: The bill could run into political trouble in both chambers because it repeals or caps a multitude of popular individual and business deductions and credits to pay for the reduction in tax rates. Beneficiaries of the current tax preferences will have to decide whether tax rate reductions are worth the significant losses of current deductions and credits. See the House and Senate JCT revenue estimates for lists of the many deductions and credits slated for elimination or reduction in order to raise revenues to offset tax cuts.
- Skewed towards wealthy: Democrats will emphasize that the bill is skewed towards wealthy Americans. The Tax Policy Center estimates that by 2027, nearly three-quarters of the tax cuts in the House bill would go to the top quintile of taxpayers, nearly half would go to the wealthiest 1 percent of taxpayers, and one-quarter would go to the wealthiest one-tenth of one percent.
- Resolving the significant policy differences between the House and Senate tax bills, while staying within the $1.5 trillion limit for the first 10 years and complying with the Byrd Rule prohibition on outyear deficits will be technically and politically complex and challenging.
- Bottom Line: For a tax bill to pass, House and Senate GOP will have to resolve their significant policy differences and agree on a slimmed-down tax bill that has no deficit impact after 10 years, keeps popular individual and business tax deductions in place, addresses the public debt concerns of fiscal conservatives, and addresses the concerns of the small business community. That being said, chances of Congress enacting a slimmed-down bill have improved, with the tentative decision to keep Obamacare repeal provisions out of the tax bill.
Links to Articles and Reports Worth Reading:
- NYTimes: Republicans Search for Proof Their Tax Plans Will Pay for Themselves
- Loopholes Aplenty: Although the combined federal and state corporate tax rate is 39 percent, loopholes effectively slash it to 18.1 percent.
- TPC: Preliminary Distributional Analysis of the House Tax Bill [Nov. 8]
- TPC: GOP Tax Plans Differ in Details but Both are Big Tax Cuts for Business, Modest Reduction for Households
- Tax Foundation: Preliminary Details and Analysis of the Senate bill [note the Tax Foundation’s projections of economic growth “rely on the assumption that the corporate tax rate cut is permanent,” which would likely violate the Byrd Rule.]
- CBPP: Tax Plan is Fiscally Irresponsible
- CBPP: Tax Bill’s Child Credit Change Would Hurt 3 Million Children
- CRFB: Comparison of House and Senate Tax Bills
- CRFB: Under Dynamic Scoring, House Tax Bill Still Explodes the Debt
- CBPP: Plan to Cut Taxes Now, Cut Programs Later Would Hurt People with Disabilities
APPROPRIATIONS AND SHUT-DOWN
Stop-gap funding for FY 2018 will expire December 8; at that time, the federal government will shut down unless another stop-gap continuing resolution is enacted or full-year appropriations for FY 2018 are enacted.
Major hurdles to enactment of appropriations are—
- lack of bipartisan agreement on how much to raise spending caps for the defense and non-defense discretionary spending categories;
- lack of agreement on whether defense and non-defense should receive equal increases;
- whether to include the Alexander-Murray legislation to continuing cost-sharing reduction (CSR) payments for low-income Americans under the Affordable Care Act; and
- addressing the Administration’s decision to end the Obama Administration’s DACA relief (although Speaker Ryan insisted Nov. 9 that DACA will not be addressed in the end-of-year package).
Senate Majority Leader McConnell said on October 31, “we are in a four-cornered bipartisan negotiation over how to fund the government, including the Trump administration.” When asked when appropriations bills would be completed, he said “that job will have to be done by Dec. 8 and I think we’re on a path to do that,” reported Congressional Quarterly.
Senate Minority Leader Schumer, D-N.Y., said negotiations are going “pretty well.” When asked whether he thought Democrats would get parity between defense and nondefense spending increases, he said “parity is something we have always stood for and are not backing away from.”
Treasury Dept. said in a November 1, 2017 statement that extraordinary accounting measures will “allow the government to continue to meet its obligations through January 2018,” despite the current suspension of the debt ceiling ending on December 8.
For background see FedWeb’s Debt Ceiling webpage.
HEALTH POLICY DEVELOPMENTS
ACA Individual Mandate:
- The Administration has been urging congressional GOP leaders to include repeal of the Obamacare individual mandate in the tax bill (although neither the bill passed by Ways & Means Committee nor the Senate Finance Committee Chairman’s mark include repeal).
- CBO reported Nov. 8 that repealing the individual mandate would increase premiums in the nongroup market by 10%, increase the number of uninsured by 13 million by 2027, and reduce deficits by $338 billion over 10 years. CBO explained, “Those effects would occur mainly because healthier people would be less likely to obtain insurance and because, especially in the nongroup market, the resulting increases in premiums would cause more people to not purchase insurance. If the individual mandate penalty was eliminated but the mandate itself was not repealed, the results would be very similar….”
CHIP and Community Health Centers:
- CBO released a cost estimate of H.R. 3922, which would extend funding for the Children’s Health Insurance Program (CHIP) and community health centers.
CBO released a cost estimate of Alexander-Murray, the Bipartisan Health Care Stabilization Act of 2017, which would:
- appropriate money for cost-sharing reductions (CSRs)through 2019;
- require many insurers to pay rebates to individuals and the federal government related to premiums in the nongroup health insurance market for 2018;
- allow anyone in the nongroup market to purchase a catastrophic plan;
- require some existing funding for health insurance marketplace operations to be used specifically for outreach and enrollment activities for 2018 and 2019; and
- make several changes to the state innovation waiver process established by the Affordable Care Act (ACA).