GOP Tax Plan Won't Cut Rate for Highest Earners--Update

By Richard Rubin, Siobhan Hughes and Kristina Peterson Features Dow Jones Newswires

The House Republican tax plan will preserve a top individual tax rate of 39.6%, according to people familiar with the matter, though party leaders are delaying its release by a day to iron out unresolved issues.

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The plan for the top rate marks a retreat for Republicans on a question that has spurred intense debate in Washington: How will a tax overhaul treat the most affluent Americans? Republicans last year had been discussing a top rate of 33%, and then moved to 35% earlier this year. But they left themselves open to the possibility of keeping it unchanged or lowering it by some smaller amount.

The plan also drops the corporate tax rate to 20%, and it delays a planned repeal of the estate tax, the people said. Those are among the details House Speaker Paul Ryan (R., Wis.) shared with conservative groups in advance of the plan's release.

House Republicans had planned to release the bill Wednesday but delayed it until Thursday to finish technical work on the legislation, circulate ideas among rank-and-file members and address thorny issues such as how to treat deductions for state and local taxes. Party leaders want to repeal the deduction, but that has sparked a rebellion from lawmakers in high-tax states like New York and New Jersey and set off a scramble for compromise, centered on keeping the deduction for property taxes.

"We are pleased with the progress we are making and we remain on schedule to take action and approve a bill at our committee beginning next week," House Ways and Means Committee Chairman Kevin Brady (R., Texas), the bill's chief author, said Tuesday night, citing consultations with President Donald Trump and House leaders.

The contours of the plan -- lower tax rates, a bigger standard deduction, fewer targeted tax incentives and a net tax cut of $1.5 trillion over a decade -- have been clear for weeks. What happens next is the unveiling of all of the particulars, which will get picked apart by Democrats and lobbyists, and perhaps by some Republicans wary of removing long-loved tax breaks.

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"Stay tuned," Mr. Brady told reporters on Tuesday. "You'll know the details very soon."

Republicans, eager to push the bill through the House by Thanksgiving and onto Mr. Trump's desk this year, are preparing an aggressive sales job, bolstered by outside conservative groups and the White House and built around the case that the tax cuts will boost the economy.

"The overall bill, it is a winner, and that's why I'm excited," said House Majority Leader Kevin McCarthy (R., Calif.).

Tax treatment for the wealthy is among the hottest issues. Democrats have slammed Republicans for planning a giveaway to the highest earners. The plan to keep a top rate of 39.6% -- though possibly for a smaller segment of the population than currently faces it -- and to move slowly toward estate-tax repeal shows the GOP is approaching rates for the wealthy cautiously.

The party also faces competing priorities and is constrained by concerns about budget deficits. Mr. Trump has said he wants the overhaul to be focused on cuts for middle-income households.

The Republican retreat on high-end individual tax rates means some high-income wage earners could face higher federal tax bills, particularly if they live in high-tax states and are thus no longer able to deduct their state income taxes, as the plan will suggest.

Democrats point to the significant benefits that remain in the plan for many high-income and wealthy households, including what is likely to be a higher income threshold for the top rate and repeal of the estate tax. Importantly, the plan is expected to include a lower rate for much business income reported on individual tax returns, which means less income will face the 39.6% tax rate.

"The GOP will give the wealthiest one percent tax breaks worth trillions of dollars, but Republicans want to force millions of hard working American families to pay more in taxes," House Minority Leader Nancy Pelosi (D., Calif.) said in a statement Tuesday.

Mr. Brady and committee members have kept the details closely guarded, and precious few bits have emerged beyond the outline that congressional Republicans and the Trump administration released in late September. That has stoked frustration and nervousness among Republicans.

Among the important pieces still unknown are new rules for the overseas income of U.S. companies, the income cutoffs for individual tax brackets, the size of the child tax credit and which rules apply to a 25% tax rate for businesses such as partnerships that pay taxes through their owners' individual tax returns. Hundreds of other details wait under the surface.

The Republicans' rate-cut goals total more than $5 trillion over a decade, but the budget they wrote allows for only $1.5 trillion. They are looking for ways to reduce the cost of their plans, either by phasing in tax cuts or repealing some tax breaks. They also need to prevent the tax plan from increasing budget deficits after the first decade if they want to avoid a 60-vote threshold in the Senate that would require Democratic votes.

The immediate corporate tax cut is important to Mr. Trump, who pushed back on Tuesday against reports that Republicans would cut the 35% rate three points at a time for five years.

"We're not looking for that, no. We're not looking for that," Mr. Trump said before a meeting with business trade-group leaders at the White House. "Some people have mentioned that. Hopefully not."

Cutting the corporate tax rate immediately boosts growth and prevents Congress from not following through on implementing a phased-in approach, said Matthew Shay, president and chief executive of the National Retail Federation, whose members typically pay relatively high effective tax rates.

"We like the predictability and the certainty of the immediacy," Mr. Shay said in an interview. He was among the executives meeting with the president.

The retention of the 39.6% individual tax rate -- likely starting at a higher income cutoff than the $480,050 called for under current law in 2018 for married couples -- marks a shift in the way Republicans think about tax policy.

For years, they had focused on driving down that top tax rate. Mr. Trump says he is instead focused on middle-income cuts and large changes to the business tax code, which he argues will boost growth and hiring.

That 40% estate tax applies only to estates that exceed $5.6 million per person starting in 2018. The repeal would take effect in the second or third year after other parts of the new tax bill take effect, according to people familiar with the matter. That plan could run into trouble in the Senate, where Republicans including Susan Collins of Maine and Mike Rounds of South Dakota don't want to include any repeal.

AshLee Strong, a spokeswoman for Mr. Ryan, said the details will come from the Ways and Means Committee. "It was a conceptual discussion of ideas included in the previously released framework, including issues that the Ways and Means Committee will need to decide," she said of the speaker's meeting. "He was not pitching a plan."

--Rebecca Ballhaus contributed to this article.

Write to Richard Rubin at richard.rubin@wsj.com, Siobhan Hughes at siobhan.hughes@wsj.com and Kristina Peterson at kristina.peterson@wsj.com

(END) Dow Jones Newswires

October 31, 2017 22:33 ET (02:33 GMT)