Republicans advanced toward final passage of a major tax overhaul Wednesday by reaching a deal between the House and the Senate to bridge the differences between the two chambers’ versions of the legislation, a compromise that would set a 21 percent corporate tax rate while lowering the top individual rate to 37 percent, lower than what was envisioned in either chamber’s original bill, according to a GOP senator.
Republicans compromised on the original goal of a 20 percent corporate rate to free up revenue to dedicate to more tax relief for high-income individuals. The trade-off is meant to ensure support for the final bill from lawmakers in high-tax states worried that the limitation on state and local tax deductions would raise taxes on some of their constituents.
Toward that same goal, the final bill also would increase the deduction for state and local taxes. It would retain a $10,000 cap on such deductions, but unlike previous versions of the bills, the cap will be applicable not just to property taxes, but also to income or sales taxes, depending on the taxpayer’s choice, a GOP lawmaker said on background because the agreement has not been announced.
“There’ll be more flexibility for people depending on sort of which taxes they pay, whether it’s sales or income or property,” said Sen. John Cornyn of Texas, the GOP Senate whip.
The possibility that some families in high-tax states could see tax hikes presented the biggest political risk to the bill for Republicans, who have dozens of members in states like New York, New Jersey, and California who could be vulnerable after passage. Democrats have attacked the bill by highlighting the limitation of the state and local tax deduction.
Although free-market advocates of the tax measure favor limiting the “SALT” deduction on the grounds that it subsidizes high spending at lower levels of government, they see the deal to increase it in the bill as a acceptable concession to get tax reform done, said National Taxpayers Union fellow Mattie Duppler. “I think that getting a plan with the host of other pro-growth provisions that this bill has is certainly the best step in the right direction,” she said.
Although the corporate tax rate would be one percentage point higher than promised, corporations would have the advantage of the rate becoming effective in 2018. In the Senate-passed version of the bill, the rate doesn’t kick in until 2019.
Also, the alternative minimum tax for corporations would be repealed. The tax was added back into the Senate bill just before it cleared the upper chamber to offset revenue lost through other tax breaks that were needed to win the votes of a few Republican senators. The alternative minimum tax for individuals would remain in the bill, although with much more income exempted.
As for non-corporate businesses, so-called pass-throughs that file through the individual side of the tax code will effectively receive a top rate of 29.6 percent via a deduction for pass-through income, said Sen. Ron Johnson, R-Wis., who fought for bigger cuts for those businesses during Senate deliberations. “I fought hard to make sure pass-throughs remained competitive,” he said. “This will be a very pro-growth tax package.”
Another concession to the $1.5 trillion revenue loss limit in the Senate bill was to stop short of repealing the estate tax. Instead, the exemption level of the tax was doubled in the bill. That approach won out in the compromise bill, too.
The zeroing-out of Obamacare’s individual mandate will be included in the final bill, Senate Majority Leader Mitch McConnell said on the Senate floor. On paper, undoing the mandate is a big revenue-raiser for the tax bill, because the government will have to pay out less in subsidies for insurance. As a result, Republicans can pack more tax cuts into the bill.
Accordingly, the compromise bill will also strip out many of the most politically toxic measures that House legislators included in their bill in order to raise revenue, including treating graduate school tuition as taxable income and eliminating the deduction for medical expenses, White House legislative director Marc Short indicated on Fox News. “I think it’s a pretty exciting deal for the American people,” he said.
One major question was whether the compromises made to reconcile the House and Senate versions of the bill would endanger support from any of the 51 GOP senators who voted for passage on their version of the bill.
In settling for a slightly higher corporate tax rate, negotiators defied the warnings of Florida Sen. Marco Rubio, who had said that revenues from a higher corporate rate should be dedicated to expanding the child tax credit. Rubio briefly commented negatively on reports of the deal Wednesday afternoon.
Nevertheless, Short expressed confidence that Republican negotiators had maintained the support of Rubio and Susan Collins of Maine, the most centrist member of the Senate GOP conference. “We feel like we’re in very good shape with each of those members, we feel like we’re in good shape with the Senate body,” he said.
Apart from the dealmaking within the Republican Party, the House-Senate conference committee held its only planned public meeting Wednesday afternoon, a pro forma session meant to meet the minimum requirements for such a committee at which Democrats loudly protested the GOP tax cuts.
After the meeting, committee chairman Kevin Brady, a Texas representative, said that the official report would be released later this week.
“I think the discussion today is about the progress we’re making in a number of areas,” he said. “But we still have work to do as well.”
