Senate tax writers are going their own way in the effort to overhaul the tax code, but the differences with the House version could complicate that chamber’s effort to keep GOP members in line.
The Senate Finance Committee released specifics of its tax plan Thursday, detailing rates, tax breaks, and potential revenue-raisers to pay for it all. Finance committee staff said they are still working on the legislative text, however.
The Senate bill draws from the same broad outline as the House version, the tax-overhaul framework released in late September, but that’s where the similarities stop.
Senate Finance Chairman Orrin Hatch didn’t follow his house counterpart, Ways and Means Chairman Kevin Brady, on several key issues, such as a hard-fought deal with House Republicans in high-tax states like New York and New Jersey to partially repeal the deduction for state and local taxes. The House bill would repeal the deduction for state income tax but still allow people to deduct up to $10,000 in property-tax payments from their federal tax bill. The Senate bill fully repeals the deduction.
Before the Senate released its version, some key House lawmakers said they’d oppose any Senate plan to fully repeal the deduction, which could raise more than $1 trillion.
“That would be a nonstarter,” Rep. Tom MacArthur of New Jersey, who played a key role in the House battle over the deduction, said Tuesday.
Throughout the tax-writing process in the House, lawmakers fought to make the numbers work on a permanent corporate rate cut from 35 percent to 20 percent. To get their bill in line with the $1.5 trillion cap on deficit-financed tax cuts under Senate budget rules, House tax writers sunsetted a family tax credit and phased out the estate tax, among other moves. Brady was able to keep the corporate rate both 20 percent and permanent, crucial to maintaining key conservative constituencies.
The Senate has taken a different tack to help meet that $1.5 trillion fiscal box, a necessity for it to advance the tax bill using budget reconciliation, bypassing a Democratic filibuster. The Senate plan delays the corporate tax cut for one year, saving tens of billions of dollars.
But some House conservatives who put a red line on the 20 percent corporate rate—they said they wouldn’t vote for a bill with anything higher—are unhappy with that Senate provision. This includes House Freedom Caucus Chairman Mark Meadows, whose 30-plus members could prove influential in either a floor vote on the House bill or a later vote on the bill after the two chambers resolve differences in the legislative texts.
“That’s dead on arrival here,” Meadows told reporters Wednesday as details of the Senate bill began to leak. “We’re not going to phase in a corporate rate. I see no logic to phasing in a corporate rate. It doesn’t promote GDP growth.”
If they can’t make a corporate rate cut permanent, Meadows said that eliminating the lower rate after 10 years would be unfortunate but may be more palatable.
“We wouldn’t want to see it, but honestly that is more acceptable in year nine than a phase-in now,” Meadows said. “Because what you would find is corporations would book different revenues based on the new rate that’s coming in. It would have a chilling effect on GDP growth.”
While the Senate version doubles the current $5.49 million exemption limit for the estate tax, it keeps the overall tax in place, a move that could help attract moderate Republicans like Maine’s Susan Collins.
Still, many conservatives view repealing the estate tax as a keystone of the tax bill. Americans for Tax Reform President Grover Norquist has called it the “crown jewel” of the plan. Repealing the tax would cost the federal government $269 billion over a decade, according to the Joint Committee on Taxation.
Other portions of the Senate bill lessen or avoid cuts to politically sensitive tax breaks, which may entice House members to press for the Senate provision if the two versions must be resolved in a conference committee.
The Senate version keeps the $1 million cap on the mortgage-interest deduction, while the House cuts it to $500,000. It preserves the deduction for student-loan-interest payments and school-supply purchases for teachers, and another for high medical bills.
The Senate bill also preserves the one-time, $13,570 adoption tax credit per child. Brady had planned to scrap the credit, but he preserved it in an amendment as the Ways and Means Committee considered the bill Thursday, after antiabortion groups and adoption advocates criticized the provision.
The Ways and Means Committee approved the tax bill Thursday. It now moves to the full House.
Those potential divisions between the Senate bill and the House plan come amid the backdrop of difficult vote math in the upper chamber, and speculation that the final bill will look more like the Senate’s version than the House’s. Republicans can lose only two members to pass a tax bill in the Senate, while in the House, that number is 22.
Aside from repealing the state and local deduction, most of the Senate’s revenue-raising provisions fall on the business side.
Like the House version, the Senate bill would limit the ability for businesses to deduct the interest paid on loans. Another provision eliminates the Section 199 deduction, a tax break for domestic manufacturers created in 2004. A third pay-for deals with the tax treatment of net operating losses for businesses.
Ray Beeman, a tax expert at Ernst & Young and former Ways and Means staff member, said he thinks the Senate bill’s impact on House politics cuts both ways. The House bill is more generous on certain points, like the state and local issue and the estate tax, which could make it an easier vote for some members. But members voting for it could be accused of advancing a process that may end with the Senate version of some provisions ultimately winning out.
“Overhanging over all of that, of course, is the political imperative to do tax reform from a Republican perspective, not to mention the economic imperative,” Beeman said.
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