Senate Tax Plan Differs From House on Individual Rates, Timing of Corporate Rate Cut

By Richard Rubin Features Dow Jones Newswires

Senate Republicans unveiled a proposal to overhaul the U.S. tax code Thursday that breaks in significant ways with a comparable House tax plan, including the level of top individual tax rates, the number of individual tax brackets, the timing of a corporate tax-rate cut and the particulars of estate tax changes.

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The Senate bill, according to Senate Finance Committee aides, would delay a corporate tax rate cut until 2019. It would also double the estate tax exemption to a maximum of about $11 million per person, but it would leave the 40% tax itself in place for estates above that exemption level.

The House bill, by contrast, cuts the corporate tax rate to 20% immediately and repeals the estate tax starting in 2024. The Senate bill also sets a 38.5% top tax rate for individuals and preserves a seven-bracket structure. The House has a 39.6% top rate and a four-bracket structure.

The Senate and House part in other important ways. The Senate would fully remove the ability of households to deduct their state and local taxes from calculations of federal taxable income. The House narrows the deduction but not completely; it leaves in place an ability to deduct up to $10,000 in property taxes.

The Senate also would set the child tax credit at $1,650, up from $1,600 in the House, but below where some GOP senators want it set.

More details were likely to be released later on Thursday.

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The contrasts in the competing bills point to the challenge the GOP faces advancing the overhaul through Congress. After winning passage in both chambers with narrow party majorities, Senate and House Republican leaders then will need to reconcile differences with each other to come up with a bill to send to President Donal Trump.

They aim to do this by year-end.

The Senate Finance Committee is scheduled to consider the bill next week, and the full Senate may vote the week after Thanksgiving. Meanwhile, House Republicans are moving toward getting their bill out of the Ways and Means Committee on Thursday and preparing for a vote by the full House next week.

After they struggled and failed to pass a health care bill and lost in state elections on Tuesday, Republicans see the tax bill as their best chance to rack up a legislative victor while they have full control of the Congress and the White House.

The overhaul represents the most thorough rewrite of the tax system since 1986. The policy gaps between the House and Senate will require Republicans to reconcile dozens or hundreds of differences.

The existence of competing plans will affect the dynamics of debate in the weeks ahead. Some House members may be wary of backing plans in their chamber if they can see that their favored provisions will fail in the Senate. The reverse may also be true. Some House members may be willing to advance the process because they like the Senate bill better.

In some respects, the Senate has less flexibility in the House. The Finance panel has a 14-12 party split, meaning that Republicans need to keep all of their members together in the committee.

And in the full Senate, Republicans have 52 seats. They can only have two members of their party vote no. Some worry about big deficits;, some prioritize larger child tax credits; some don't want tax cuts that favor the wealthiest Americans. And many will have narrow, state-focused priorities and the clout to insist on them.

Differences between the House and Senate are especially evident in the evolving debate about the state and local tax deduction. Most Republican senators are prepared to eliminate the deduction, which hits high tax states like New York, New Jersey and California hardest. Senate Republicans tend not to represent high taxed states like that. With full repeal, the Senate bill has money to address other Republican priorities -- like a child tax credit and keeping some other favored deductions. In the House, by contrast, the party can't afford to lose too many members from New York or New Jersey and it keeps remnants of the state and local deduction.

Another obstacle: The Senate bill faces what's known as the Byrd Rule, a requirement that the overhaul not increase deficits beyond the first 10 years. As constructed now, the bill may not meet that test. Committee aides say they will need to adjust it to comply. Otherwise, Republicans would be unable to get a bill through the Senate on a fast-track process -- likely along party lines -- with just 50 votes.

The Senate bill preserves some tax breaks that the House bill would eliminate. Those include the ability to deduct mortgage interest on loans up to $1 million, and deductions for medical expenses and student loan interest. The Senate bill would also retain an extra deduction for the blind and elderly and the ability to deduct mortgage interest on second homes.

In other ways, the House and Senate tax plans fall in the same framework. They would each cut taxes by about $1.5 trillion over a decade, repeal the alternative minimum tax, repeal personal exemptions and nearly double the standard deduction. They would both remove narrow tax breaks and create a one-time tax on stockpiled foreign profits. Both would have immediate write-offs for business investments, but those would both expire after five years.

The Senate proposes different rules on international taxes than the House does. Those include a 12.5% tax on certain foreign profits produced from intangible assets such as patents and copyrights, whether those assets are in the U.S. or abroad. That would affect U.S.-based technology and pharmaceutical companies. The plan also includes a new rule to limit tax avoidance by foreign-based companies operating in the U.S.

The Senate differs in how it treats pass-through businesses -- partnerships, S-corporations and other businesses that pay taxes through individual tax returns. The Senate bill would create a new deduction for pass-through business income. The deduction lowers the top tax rate for these business from the current 39.6%, but keeps it above 30%. That is higher than the new 25% rate that congressional leaders have promised and which is in the House bill. It could be a point of contention for business groups, depending on the details.

Write to Richard Rubin at richard.rubin@wsj.com

WASHINGTON -- Senate Republicans on Thursday unveiled a proposal to overhaul the U.S. tax code that breaks in significant ways with a comparable House tax plan, including on the level of top individual tax rates, the number of individual tax brackets, estate tax changes and the timing of a corporate tax-rate cut.

The Senate bill, according to Senate Finance Committee aides, would cut the corporate tax rate to 20% starting in 2019. It would also double the estate- tax exemption to a maximum of about $11 million per person, but it would leave the 40% tax itself in place for estates above that level.

The House bill, by contrast, would cut the corporate tax rate to 20% immediately and repeal the estate tax starting in 2024. The Senate bill also sets a 38.5% top tax rate for individuals and preserves a seven-bracket structure; the top rate starts at $1 million for married couples and $500,000 for individuals, said Sen. John Hoeven (R., N.D.) The House has a 39.6% top rate and a four-bracket structure.

"Yes, the Senate bill is going to be different than the House bill, because, you know what? That's the legislative process," House Speaker Paul Ryan (R., Wis.) told reporters Thursday. "The House will pass its bill, the Senate will pass its bill and then we will get together and reconcile the differences, which is the legislative process. And that's how this process will continue."

The contrasts in the competing bills point to the challenge Republicans face advancing the overhaul through Congress, which they intend to do by year-end. If they win passage in both chambers with narrow party majorities, Senate and House Republican leaders would then need to reconcile differences with each other to come up with a bill to send to President Donald Trump.

"This is our once-in-a-generation opportunity to lower taxes and shift the economy into high gear, said Sen. Mitch McConnell (R., Ky.).

The Senate and House part in other important ways. The Senate would end households' ability to deduct their state and local taxes from calculations of federal taxable income. The House narrows the break, allowing a deduction of up to $10,000 in property taxes.

The Senate also would set the child tax credit at $1,650, up from $1,600 in the House, but below where some GOP senators want it set.

"It's not where we need to be yet, but we'll get there," said Sen. Marco Rubio (R., Fla.)

The Senate Finance Committee is scheduled to consider the bill next week, and the full Senate may vote the week after Thanksgiving. Meanwhile, House Republicans are moving toward getting their bill out of the House Ways and Means Committee on Thursday and preparing for a vote by the full House next week.

House Republicans made late changes in their bill Thursday, increasing a one-time tax on foreign profits, adding new lower rates for small businesses to win support from business groups and exempting car dealers from a limit on interest deductions.

"One thing seems clear: There isn't enough money to pay for everything that each house wants," said Greg Valliere, chief global strategist at Horizon Investments. "Something has to give -- most likely corporate tax relief, which may not be as generous as proponents expected a few weeks ago."

After they struggled and failed to pass a health care bill and lost in state elections on Tuesday, Republicans see the tax bill as their best chance to rack up a legislative victory while they have full control of the Congress and the White House.

The overhaul would represent the most thorough rewrite of the tax system since 1986. The policy gaps between the House and Senate will require Republicans to reconcile dozens or hundreds of differences.

The competing plans will affect the dynamics of debate in the weeks ahead. Some House members may be wary of backing plans in their chamber if they can see that their favored provisions will fail in the Senate.

"The Senate Republicans are completely pulling the rug out from under their colleagues who represent suburban districts in the House," said Sen. Chuck Schumer (D., N.Y.), who has been fighting to preserve the state and local tax deduction.

The reverse may also be true. Some House members may be willing to advance the process because they like the Senate bill better.

In some respects, the Senate has less flexibility than the House. The Senate Finance panel has a 14-12 party split, meaning that Republicans need to keep all of their members together in the committee.

And in the full Senate, Republicans have 52 seats. They can't pass a bill if more than two members of their party vote no. Some worry about big deficits; some prioritize larger child tax credits; some don't want tax cuts that they say favor the wealthiest Americans. And many will have narrow, state-focused priorities and the clout to insist on them.

Differences between the House and Senate are especially evident in the evolving debate about the state and local tax deduction. Most Republican senators are prepared to eliminate the deduction, which hits high tax states like New York, New Jersey and California hardest. Senate Republicans tend not to represent high-taxed states like that. With full repeal, the Senate bill has money to address other Republican priorities -- like a child tax credit and keeping some other favored deductions. In the House, by contrast, the party can't afford to lose too many members from New York or New Jersey, so its bill keeps remnants of the state and local deduction.

Another obstacle: The Senate bill faces what's known as the Byrd Rule, a requirement that the overhaul not increase federal budget deficits beyond the first 10 years. As constructed now, the bill may not meet that test. Committee aides say they will need to adjust it to comply. Otherwise, Republicans would be unable to get a bill through the Senate on a fast-track process -- likely along party lines -- with just 50 votes.

The Senate bill preserves some tax breaks that the House bill would eliminate. Those include the ability to deduct mortgage interest on loans up to $1 million, and deductions for medical expenses and student loan interest. The Senate bill would also retain a deduction for the blind and elderly and the ability to deduct mortgage interest on second homes.

In other ways, the House and Senate tax plans fall in the same framework. They would each cut taxes by about $1.5 trillion over a decade, repeal the alternative minimum tax, repeal personal exemptions and nearly double the standard deduction.

They would both remove narrow tax breaks and create a one-time tax on stockpiled foreign profits. Both would have immediate write-offs for business investments, but those provisions would expire after five years. Neither bill touches the individual mandate to purchase health insurance.

However, the Senate plan breaks from the unified framework that the House, Senate and Trump administration released in September in a few ways, namely on estate tax repeal and the number of tax brackets.

Republicans played down the difference on the corporate rate cut.

"It may be delayed one year, but immediate expensing is included up front, which is a huge deal," Sen. Mike Rounds (R., S.D.) told reporters.

The Senate proposes different rules on international taxes than the House does. Those include a 12.5% tax on certain foreign profits produced from intangible assets such as patents and copyrights, whether those assets are in the U.S. or abroad. That would affect U.S.-based technology and pharmaceutical companies. The plan also includes a new rule to limit tax avoidance by foreign-based companies operating in the U.S.

The Senate differs in how it treats pass-through businesses -- partnerships, S-corporations and other businesses that pay taxes through individual tax returns. The Senate bill would create a new deduction for pass-through business income. The deduction lowers the top tax rate for these business below the current 39.6%, but keeps it above 30%. That is higher than the new 25% rate that congressional leaders have promised and which is in the House bill. It could be a point of contention for business groups, depending on the details.

Write to Richard Rubin at richard.rubin@wsj.com

Senate Republicans' proposal to rewrite the tax code breaks significantly with the one crafted by the House GOP, confronting party leaders with dozens of differences to reconcile and little time before the year-end deadline they've set to pass it.

The Senate plan, released Thursday, contrasts with the House in key areas, including the timing of a corporate tax-rate cut, the number of individual tax brackets, the details of international tax rules, and the particulars of estate-tax changes.

Despite the differences, Republicans say they are confident they can prevail in cutting taxes by about $1.5 trillion over a decade, aided by an advertising blitz from business groups and conservatives and motivated by the political imperative to rack up a major legislative victory ahead of next year's mid-term elections.

House and Senate Republicans are trying to refine and pass their respective bills in the next few weeks, needing to reconcile their differences while operating with slim majorities and working against the backdrop of rough election defeats this week that make some lawmakers more wary of disturbing a restive electorate.

"We still have a lot more work, but we're really excited," said Gary Cohn, Mr. Trump's chief economic adviser.

The Senate bill, according to Senate Finance Committee aides, would delay until 2019 a cut in the corporate tax rate to 20%. It also would double the estate-tax exemption to a maximum of about $11 million per person, but it would leave the 40% tax itself in place for estates above that level. The Senate bill also sets a 38.5% top tax rate for individuals and preserves a seven-bracket structure; the top rate starts at $1 million for married couples and $500,000 for individuals, said Sen. John Hoeven (R., N.D.).

The House bill, by contrast, would cut the corporate tax rate immediately and repeal the estate tax starting in 2025. The House plan proposes a 39.6% top rate for individuals and a four-bracket structure.

"The House will pass its bill, the Senate will pass its bill and then we will get together and reconcile the differences, which is the legislative process," House Speaker Paul Ryan (R., Wis.) told reporters Thursday. "And that's how this process will continue."

Stocks fell during the day amid worries over the prospects for a tax rewrite, and the specter of a delay in corporate tax relief, but pared their declines later. The Dow Jones Industrial Average had fallen as many as 253 points by early afternoon, but ended the day down 101.42 points, or 0.4%, at 23462.94, The S&P 500 fell 0.4%, while the Nasdaq Composite dropped 0.6%.

Mark Travis, chief executive of Intrepid Capital Management, a Milwaukee-based fund manager, said Thursday's selloff intensified following reports that the Senate tax bill would delay the corporate-tax-rate cut until 2019. He added that would likely cause investors to sell some of their assets to lock in some of the year's gains.

The Senate Finance Committee is scheduled to consider the bill next week, and the full Senate may vote the week after Thanksgiving. Meanwhile, House Republicans moved their bill out of the Ways and Means Committee Thursday, preparing for a vote by the full House next week.

"One thing seems clear: there isn't enough money to pay for everything that each house wants," said Greg Valliere, chief global strategist at Horizon Investments. "Something has to give -- most likely corporate tax relief, which may not be as generous as proponents expected a few weeks ago."

After they struggled and failed to pass a health care bill and lost in state elections on Tuesday, Republicans see the tax bill as their best chance for a legislative victory while they have full control of the Congress and the White House. But some of the changes they're proposing could be liabilities in the swing districts they're defending in the House.

House Republicans made late changes in their bill Thursday, keeping the adoption tax credit, increasing a one-time tax on foreign profits, adding lower rates for small businesses, bumping up taxes on multinational corporations and exempting car dealers from a limit on interest deductions.

Differences between the House and Senate are especially evident in the debate about the state and local tax deduction. Republican senators are prepared to eliminate the deduction, which hits high-tax blue states like New York, New Jersey and California hardest.

The Senate would repeal the deduction, a decision that freed up money for other priorities. The House narrows the deduction but doesn't completely end it; it leaves in place the ability to deduct up to $10,000 in property taxes.

"Senate Republicans are completely pulling the rug out from under their colleagues who represent suburban districts in the House," said Sen. Charles Schumer (D., N.Y.), who has been fighting to preserve the state and local tax deduction.

As the debate moves ahead, the Senate Republican will operate with less flexibility than the House. The Senate finance panel has a 14-12 party split, meaning that Republicans need to keep all of their members together in the committee.

And in the full Senate, Republicans have 52 seats. They can't pass a bill if more than two members of their party vote no. Some worry that the plan would add too much to federal budget deficits. some prioritize larger child tax credits; some don't want tax cuts that they believe favor the wealthiest Americans. And many will have narrow, state-focused priorities and the clout to insist on them.

Another obstacle: The Senate bill faces what is known as the Byrd Rule, a requirement that the overhaul not increase deficits beyond the first 10 years. As constructed now, the bill may not meet that test, Senate Finance Committee aides said. The aides say they will need to adjust it to comply. Otherwise, Republicans would be unable to get a bill through the Senate on a fast-track process without needing Democratic votes.

In other ways, the House and Senate tax plans fall in the same framework. They each would repeal the alternative minimum tax, repeal personal exemptions and nearly double the standard deduction.

They would both remove narrow tax breaks and create a one-time tax on stockpiled foreign profits. Both would have immediate write-offs for business investments, but those provisions would expire after five years. Neither bill touches the individual mandate to purchase health insurance.

However, the Senate plan breaks from the unified framework that the House, Senate and Trump administration released in September in a few ways, namely on estate tax repeal and the number of tax brackets.

Sen. John Thune (R., S.D.) said the additional brackets were needed to direct more tax cuts to middle-class households; no analysis is available yet.

The Senate also would set the child tax credit at $1,650, up from $1,600 in the House. Sens. Marco Rubio (R., Fla.) and Mike Lee (R., Utah) said that's not enough.

The Senate proposes different rules on international taxes than the House. Those include a 12.5% tax on certain foreign profits produced from intangible assets such as patents and copyrights, whether those assets are in the U.S. or abroad. That would affect U.S.-based technology and pharmaceutical companies. The plan also includes a new rule to limit tax avoidance by foreign-based companies operating in the U.S.

The Senate differs in how it treats pass-through businesses -- partnerships, S-corporations and other businesses that pay taxes through individual tax returns. The Senate bill would create a new deduction for pass-through business income, while the House has a special rate but limits on who can get that rate.

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

November 09, 2017 19:53 ET (00:53 GMT)