Congress Is on Brink of Tax Overhaul -2-

By FeaturesDow Jones Newswires

Congress stands on the verge of passing a $1.5 trillion tax cut and the largest structural overhaul of the tax system since 1986.

The bill sailed through the House Tuesday afternoon on a 227-203 vote with little drama, then a last-minute glitch forced Republican leaders to schedule another vote in the House Wednesday. Every Democrat who was present voted no, as did 12 Republicans, almost all from high-tax states.

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The Senate was preparing to vote on the bill Tuesday evening, then the House plans to vote again Wednesday morning because at least two provisions ran afoul of Senate rules. The White House is planning for President Donald Trump to mark the bill's passage, but no date for its signing has been set.

Most of the tax cuts will take effect in January, and many workers will see bigger paychecks from reduced tax withholding by February.

"We ran on it in 2016. We spent 2017 working on this legislation, and here it is. We're getting it done," said House Speaker Paul Ryan (R., Wis.), who hugged and high-fived his colleagues as the voting ended. "This was a promise made and this is a promise kept."

Tuesday's vote delivers the signature legislative victory Mr. Trump sought in his first year in his office, creates a career-defining moment for Mr. Ryan and yields talking points for hundreds of Republican lawmakers who came to Washington to lower taxes. By repealing the individual mandate to purchase health insurance, it strikes a blow at the Affordable Care Act.

For Democrats, who found unity in opposition, the tax bill and its weak rating in polls will likely turn into television ads about Republicans helping corporations and ideas for reversing parts of it if they take power in next year's midterms.

"The tax bill Republicans jammed through Congress today stacks the cards against working Americans while rewarding big Republican donors and the Trump family," said Rep. Bill Pascrell (D., N.J.). "In this bill, Congress put its thumb on the scale for the wealthy and well-connected."

The Republican plan offers deep tax cuts for businesses, lower rates for many individuals and a narrower estate tax. Corporate shareholders, business owners and most households will benefit, at least in the first few years. But there will be taxpayers who pay more, including some who live in households where state and local taxes are high.

The Republican tax bill isn't quite the biggest tax cut ever, as the GOP president often calls it. It does cut the corporate tax rate -- in one single bill -- more than ever before. But other tax cuts, most notably former President Ronald Reagan's 1981 program, were larger as a share of gross domestic product, according to Treasury Department analyses.

Still, it is more than just a collection of tax cuts. It includes a fundamental rethinking of business taxation and international tax rules, and Republicans are challenging some cherished and once-sacrosanct tax breaks, shrinking the deduction for state and local taxes and making the mortgage-interest deduction less valuable.

Republicans reaped the benefits of three elections -- the takeover of the House in 2010, the Senate flip in 2014 and Mr. Trump's surprise victory last year. That realignment left the GOP in control of Congress and the White House for the first time since 2007. The coalition wasn't able to repeal the Affordable Care Act, which Republicans campaigned against, but found its footing in the more comfortable terrain of tax policy. Senate Majority Leader Mitch McConnell (R., Ky.) held his lawmakers together in ways that he couldn't back in July on health care.

Many households are still sizing it up. Joyce Prior, a 59-year-old accountant who contracts out to companies and lives in Salem, Wis., said her tax bill could go down, but not enough to change her plans. She and her husband make between $80,000 and $90,000 a year.

"We could do a little bit more toward the house that we want to do," she said. "But I mean, $500 isn't really enough of an incentive to me."

The plan was seven years in the making, the dream of GOP leaders since they took control of the House and a reminder that little unites the Republican Party more than tax cuts. The final bill also was the product of seven weeks of lightning-fast legislating jammed between Halloween and Christmas.

Democrats sought more hearings to study the bill. They demanded Mr. Trump's tax returns, so they could see how the president would benefit. They asked Senate Republicans to delay the last vote until Sen.-elect Doug Jones (D., Ala.) could be seated. They pointed to polls showing the bill is unpopular. Republicans brushed those arguments aside.

"They did the calculation and decided that it was going to be easier to get it done without dragging their feet," said tax historian Joe Thorndike, director of the Tax History Project at Tax Analysts, a publisher. "This really might cost them over the long run, not because voters are going to be outraged at the fact that it was rushed, but because Republicans deprived themselves of the opportunity to make the case here."

Ultimately, its success will depend on how the economy responds. The legislation will cut the U.S. corporate tax rate to 21% from 35%, a move cheered by companies as crucial for encouraging investment in the U.S. It will also allow faster write-offs for business investments, sharply limit companies' ability to deduct interest expenses and usher in a new set of untested rules for taxing international profits.

"They deserve a new tax code that allows them to compete and win anywhere in the world," said Rep. Kevin Brady (R., Texas), who autographed copies of the bill for House Republicans on the floor.

U.S. corporations will pay a one-time tax of up to 15.5% on profits they have stockpiled abroad. Going forward, many will face no U.S. taxes on their foreign income, a change that puts the U.S. in line with other major developed countries. The bill includes rules to prevent companies from shifting more profits to low-tax jurisdictions to take advantage of that benefit, though Democrats said they aren't tough enough.

"The international reforms are huge and don't get talked about as much," said Sen. John Thune (R., S.D.). "That kind of stuff is just really long-lasting."

Republicans are also cutting taxes for pass-through businesses, the partnerships, S corporations and sole proprietorships that pay taxes on their owners' individual tax returns. That, too, is a new idea, one that tax experts warn is fraught with unknowns, because it could unleash a flurry of aggressive tax maneuvering by businesses to reap the benefits of an untested system.

Republicans argue the tax plan will spur much faster economic growth and pay for itself, though the official estimates say that argument is overstated. The House and Senate bills would produce modest growth and add $1 trillion to projected budget deficits over the next decade, after accounting for that expansion, according to the Joint Committee on Taxation, the nonpartisan congressional tax scorekeeper.

"Where are the vaunted Republican deficit hawks?" asked House Minority Leader Nancy Pelosi (D., Calif.) on the House floor. "Are they endangered? Are they extinct?"

Most households will see tax cuts in 2018, and Republicans refined the plan over the past month to shrink the number of people who will pay more. They dropped some of the most controversial ideas, including first-in, first-out accounting for stock sales, which stood to boost capital-gains taxes for investors, the repeal of the deduction for medical expenses and taxes on graduate-student tuition waivers.

The final plan nearly doubles the standard deduction, lowers marginal tax rates for individuals and doubles the child tax credit to $2,000. The top rate goes to 37% from 39.6%, while tax rates for capital gains and dividends are untouched. The bill shrinks the alternative minimum tax so 200,000 people will pay it instead of 5.2 million. It doubles the estate-tax exemption to $11.2 million per person, so fewer than 0.2% of estates will pay it.

It also takes away some longstanding tax breaks for individuals. The state and local tax deduction gets a $10,000 cap, and the personal exemption disappears. Incentives for mortgages and charitable contributions shrink, because the larger standard deduction means fewer households will itemize their deductions. Objections from home builders, real-estate agents, the AARP and nonprofits weren't enough to alter the Republican push for lower rates.

More than 80% of U.S. households will get a tax cut in 2018, and 5% will see their taxes go up, according to the Tax Policy Center. The middle 20% of households will get a tax cut averaging $930, amounting to 1.6% of after-tax income. Households in the top 1% get an average tax cut in 2018 of $51,140, or 3.4% of after-tax income. That is not universal; 9% of households in that top group will get a tax increase averaging $93,910.

The plan cuts taxes for all income groups, on average, and it slightly shifts the remaining tax burden toward households making between $100,000 and $200,000 and those making more than $1 million in 2019, according to the Joint Committee on Taxation.

Those effects fade over time and then dramatically change after 2025, when the individual income tax cuts are scheduled to expire and a tougher measure of inflation remains in place to push people into higher tax brackets. If unaltered, that will push up the tax bills of many households, according to the JCT.

Republicans did that to stay within the boundaries of the procedures they are using to pass the bill on a simple-majority vote in the Senate.

Democrats argued that the combination -- temporary individual tax cuts and permanent corporate cuts -- showed Republican priorities skewed toward business and away from middle-income families. By 2027, unless Congress acts again, 83% of the remaining benefits would go to the top 1% of households and more than half of households would get tax increases averaging $180, according to the Tax Policy Center.

Republicans rejected the notion that future tax increases would ever materialize. They pointed to Congress's decisions in 2010 and 2013 to extend most of former President George W. Bush's expiring tax cuts. They say the business tax cuts will help households by spurring growth, investment, hiring and wage gains.

The plan does more than cut taxes. Starting in 2019, it ends the federal penalty for not having health insurance, fulfilling at least part of the Republican pledge to curtail the Affordable Care Act. As a result, according to official estimates, millions more people will go without health insurance. That is because some people will choose not to purchase insurance and some won't sign up for Medicaid, reducing federal spending by more than $300 billion over a decade.

The bill also opens up part of the Arctic National Wildlife Refuge to oil drilling, achieving a long-sought Republican goal. It will also trigger automatic spending cuts, including in Medicare, unless Congress votes to reverse them.

--Shayndi Raice and Siobhan Hughes contributed to this article.

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

(END) Dow Jones Newswires

December 19, 2017 21:23 ET (02:23 GMT)