Senate GOP reveals different approach on tax reform

Senate Republicans revealed their own version of tax-reform legislation Thursday, breaking with President Trump by offering a one-year delay to the corporate tax cut, and with House Republicans by completely repealing a deduction for state and local taxes.

The Senate bill also keeps in place the estate tax as well as a variety of popular tax credits and deductions for adoption, medical expenses, teacher expenses and graduate school.

The differences likely sets up a difficult conference negotiation between the chambers later in the year, assuming Senate Majority Leader Mitch McConnell (R-Ky.) can round up enough votes to pass the legislation — an uncertain prospect at this point.

The Senate Finance Committee unveiled details of the legislation to Republican senators during a special morning meeting in the Senate’s Strom Thurmond Room.

GOP leaders hope to bring the legislation to the floor after Thanksgiving.

Separately, the House Ways and Means Committee approved its version of the tax legislation, setting up a likely floor vote in the House next week.

The Senate legislation has the same basic framework as the House bill: It cuts the corporate tax rate to 20 percent, establishes a lower tax rate for pass-through businesses and cuts individual rates.

But in a big shift with the House bill, it would delay the corporate tax cut for one year, to 2019.

That would save the Senate money, which could be used to make changes to other deductions. 

But it will be a disappointment to President Trump and House Republicans who say it is important to lower the corporate rate immediately to create jobs and help U.S. companies.

Senate Republicans have debated in recent days whether to delay the rate cut, and there are clear divisions within the caucus.

“That’s the worst thing we can do. We need to get this thing going right now,” Sen. David Perdue (R-Ga.) said Wednesday.

In a big disappointment for conservatives such as Sens. Ted Cruz (R-Texas) and Rand Paul (R-Ky.), the legislation — like the House bill — does not include language to repeal ObamaCare’s individual insurance mandate. 

“This tax is deeply unpopular, it punishes working-class families for not being able to afford insurance, and repealing it would save over $300 billion,” said Sen. Tom Cotton (R-Ark.), who wanted the repeal included. “We can improve this bill, and the first priority should be to repeal this unfair tax.” 

Senate Republican Whip John Cornyn (Texas), a member of the Finance Committee, told reporters that the panel is “taking a hard look” at adding the repeal of the individual mandate to the bill.

Cornyn said tax writers are also looking for a way to make the new corporate tax rate permanent.

The bill also eliminates the entire deduction for state and local taxes, unlike the House bill, which would allow people to deduct up to $10,000 in property taxes. 

Senate GOP leaders explained that in contrast to Speaker Paul Ryan (R-Wis.), they don’t have to worry about Republican colleagues from high-tax states such as New York, New Jersey and California, which are entirely represented by Democrats in the upper chamber. 

The Senate bill would keep in place the current threshold of $1 million for the mortgage interest tax deduction, while the House bill would lower it to $500,000.  

It establishes a different approach for taxing pass-through businesses by recognizing that capital-intensive businesses receive a greater share of revenue from investment than assumed in the House bill, which would tax 70 percent of pass-through revenue as wages at individual rates and only 30 percent as business income subject to a lower 25-percent rate.

The Senate bill would establish a pass-through deduction of about 17 percent, which would result in blended rate of close to 30 percent for small businesses in the top bracket, according to a Finance Committee aide.

The House bill’s treatment of small-business taxation would likely result in a blended rate of 35 percent to 38 percent. 

Sen. Rob Portman (R-Ohio) told reporters he thought the new rules for pass-throughs would provide more tax relief to small businesses.

In another significant difference with the House, the Senate bill retains seven tax brackets for individuals and keeps in place some popular tax credits, such as the adoption tax credit, according to Sen. John Hoeven (R-N.D.), who attended the Thursday briefing.

The Senate measure establishes a top individual tax rate of 38.5 percent. The other individual rates would be 10 percent, 12 percent, 22.5 percent, 25 percent, 32.5 percent and 35 percent, Hoeven said.

GOP senators expressed concern last week about the optics of the House bill replacing the 10-percent bracket with a 12-percent bracket, even though low-income individuals would have been held harmless by the doubling of the standard deduction. 

Separately, in the House, Ways and Means Committee Chairman Kevin Brady (R-Texas) offered an amendment to keep the adoption tax credit in that legislation.

Senators such as Roy Blunt (R-Mo.), Ben Sasse (R-Neb.) and James Lankford (R-Okla.) had previously expressed support for keeping the adoption credit.

Whereas the House bill would eliminate the tax on all large estates, the Senate bill would double the current exemption of $11 million for couples to $22 million, according to Hoeven.

Members of the Senate Finance Committee put some of the finishing touches on the bill during a meeting with National Economic Council Director Gary Cohn on Wednesday evening at the Capitol. 

Senators decided to change the formula for taxing small businesses after the National Federation of Independent Business slammed the House bill for leaving “too many small businesses behind.”

Sen. Tim Scott (R-S.C.), a member of the Finance panel, advocated for setting a higher threshold on mortgage interest deductions compared to the House bill after the National Association of Home Builders slammed the House legislation as something that would hurt home values. 

The legislation will next move to the Finance Committee for a lengthy markup, which will give Republican and Democratic members a chance to offer amendments. 

“The proposal will go through regular order in the committee. Senators on both sides will have the opportunity to offer amendments, and work together to help hardworking families in our country,” McConnell said.

– This story was updated at 5:10 p.m.