Tax Plan Puts GOP Divisions on Display

By Kristina Peterson and Siobhan Hughes Features Dow Jones Newswires

Republicans cheered the unveiling of their long-awaited tax-overhaul bill, though fault-lines quickly emerged over some of its components.

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"This plan is for the middle-class families in this country who deserve a break," House Speaker Paul Ryan (R., Wis.) told reporters Thursday.

Yet the 400-page measure also drew quick rebuffs from some of the Republicans' reliable allies outside of Congress, including the Club for Growth, the National Association of Realtors, and the National Federation of Independent Business, which represents small businesses.

The divisions reflect some of the trade-offs GOP leaders had to make to lower the corporate tax rate and lower income-tax rates for many households. The fissures also illustrate the Republicans' struggle to accommodate President Donald Trump's populist leanings as they pursue the longstanding conservative goal of rewriting the tax code.

Epitomizing this battle was GOP leaders' decision to leave the top individual income-tax rate at its current level of 39.6%, though the income threshold paying this rate rose to $1 million for married couples, up from $480,050. Many Republicans had hoped to lower the top rate as well, arguing that reducing it to 33% or 35% would juice job creation and stimulate the economy.

"If you're going to have tax reform, it needs to be for everybody," said Rep. Roger Williams (R., Texas.) "A lot of people in the 39% tax bracket are the ones who create jobs."

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David McIntosh, president of the Club for Growth, a conservative advocacy group, praised the bill, but criticized the preservation of the 39.6% rate, saying it "effectively punishes success and caves to the Democrats' class warfare rhetoric."

Republicans are trying to separate business income in the top bracket from wage income. They are proposing a special 25% rate for business owners who pay taxes through their individual returns while leaving that top wage rate in place. Rep. Tom McClintock (R., Calif.) spoke out against retaining the 39.6% rate when the House GOP met privately Thursday to get briefed on the bill.

"I am concerned that by leaving the highest marginal rate where it is, we are minimizing the growth potential of the tax reform," Mr. McClintock said after the meeting. "I certainly hope they'll take another look at it."

Neil Bradley, of the U.S. Chamber of Commerce, which represents a wide range of businesses, said the proposal is "exactly what our nation needs to get the economy growing faster." However, he added, "a lot of work remains to be done to get the exact policy mix right."

Other Republicans said they embraced the decision to leave the wealthiest Americans paying more of certain taxes so lawmakers could broaden relief for the middle class, which they hope will insulate them from some Democratic attacks.

"It's awfully hard to have sympathy for someone making seven figures," said Rep. Bill Huizenga (R., Mich.) "If this is less relief for the upper income, yet lowers the temperature on the political rhetoric that's out there, then I think that's probably worth it."

Republicans' effort this year to dismantle the Affordable Care Act came up short in part because Democrats painted their legislation as tax breaks for the most affluent at the expense of health-care coverage for older and poorer Americans.

And Mr. Trump has made clear that he wants to deliver a middle-class tax cut, a message that has shaped how GOP leaders have pitched their bill. They also needed to find revenue to offset the cost of big tax cuts in order for the bill to clear procedural hurdles in the Senate.

Democrats said they weren't surprised by the GOP tension over the issue.

"I imagine it is divisive," House Minority Whip Steny Hoyer (D., Md.) said Thursday. "I imagine the GOP would prefer to give everybody at the very top a very large tax cut."

Other GOP divides emerged over issues critical to specific regions and industries that would see their tax breaks curbed under the House proposal. One of the biggest hurdles remains the bill's limits on deducting state and local taxes, a blow especially to many wealthier residents of high-tax states including New York and New Jersey.

The bill would eliminate the deduction for state and local income and sales taxes. In a compromise, GOP leaders agreed to preserve a deduction for property taxes, capped at $10,000, though some Republicans said that would not be sufficient to win their vote.

"Adding back in the property tax deduction up to $10,000 is progress, but not enough progress," said Rep. Lee Zeldin (R., N.Y.), saying he would vote no on the current bill. "If I'm not fighting for New Yorkers, I can't expect anyone else from another state to do it for me." New Jersey GOP Reps. Frank LoBiondo and Leonard Lance also said the current bill was unacceptable, citing similar concerns.

Rep. Dan Donovan (R., N.Y.) said his delegation would press to retain more of the state and local tax deduction. "We're still in the process of fighting for it," he said. In his district, which includes Staten Island and South Brooklyn, state and local income taxes are high, especially compared with property taxes, Mr. Donovan noted.

But other Republicans in the region said the compromise of retaining the property-tax deduction made the bill palatable to them.

"In our area of upstate New York, that goes a long way to protecting a lot of people subject to those high property-tax bills, so it's in the right direction," said Rep. Tom Reed (R., N.Y.), a member of the House Ways and Means Committee, which wrote the tax bill.

Republicans also signaled that other fights are likely to intensify over many of the decisions GOP leaders made to find enough money to pay for the corporate tax cut and the lowering of income-tax rates.

For instance, the House GOP bill would curtail the deduction that businesses currently can take on interest they pay on debt. Mr. Williams, whose family owns a car dealership, said he worried that would force companies to pull back their inventory, if they rely on loans to buy it, reducing choices for consumers and slowing job growth.

And many Republicans said they would be closely scrutinizing the bill's complicated rules around pass-through businesses, which would likely leave some companies with a lower rate than others.

The provision prompted the NFIB to announce its opposition to the measure "in its current form," said Juanita Duggan, the group's president. "This bill leaves too many small businesses behind."

Some GOP senators also signaled concerns on Thursday.

Sen. Jeff Flake, an Arizona Republican who announced last week that he would not run for re-election next year, said he was troubled by a tax plan that would add $1.5 trillion to the federal budget deficit over 10 years, as permitted by the budget passed by both chambers.

"We have been hearing a lot about cuts, cuts, cuts. If we are going to do cuts, cuts, cuts, we have got to do wholesale reform," Mr. Flake said on the Senate floor. "We cannot simply rely on rosy economic assumptions, rosy growth rates to fill in the gap. We have got to make tough decisions."

--Richard Rubin contributed to this article.

(END) Dow Jones Newswires

November 02, 2017 18:10 ET (22:10 GMT)