Senate Republicans, in their push last week to pass a sweeping tax bill, undermined a research-and-development tax credit many companies use to encourage innovation, and business interests are in revolt.
Late Friday, just hours before the Senate passed the bill, Republicans decided to preserve the corporate alternative minimum tax instead of repealing it as planned. The change helped them provide money for lawmakers' other priorities, but it could also force many companies to lose tax breaks the bill's authors intended to protect.
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Addressing this problem is one of the many challenges congressional Republicans face as they shepherd a final tax bill with implications for middle-class households, American businesses and the health-care system. The House and Senate passed competing bills that must now be merged into one.
Among other thorny issues, Republicans will likely wrangle over international tax rules, how to design a new system for taxing pass-through businesses such as partnerships and whether the estate tax should be repealed or just narrowed.
Also up for grabs: the final corporate tax rate, which President Donald Trump, having pressed for a rate of 20%, this weekend allowed the possibility it could rise to 22%.
All this will happen under pressure from the president to conclude by Christmas. The tax plans aren't retroactive, but they're largely scheduled to take effect Jan. 1. The House is expected to vote Monday evening to start a conference committee and name its negotiators. The Senate's timing for heading to a conference is less certain.
For the GOP, the conference committee is the last remaining obstacle to a political victory that will bolster the party going into the 2018 campaign season. That imperative creates pressure to move quickly and cut deals, but the ultimate version will still need to get 218 votes in the House and 50 in the Senate in a later vote.
"We've been so focused on getting this through the Senate. I haven't had a lot of opportunity to discuss this with the House," said Sen. Pat Toomey (R., Pa.). "Let's be clear. These are very, very similar bills. The architecture is the same. The big priorities are virtually the same. So I'm confident we'll be able to work this out."
For companies, the conference committee is one last chance to pitch for a special break or warn of unintended consequences. For Democrats, there's one last chance to sway a few Republicans against the tax plan and point out its flaws. Sen. Ron Wyden (D., Ore.) said he expected Republicans to have a "conference in name only" and said he wasn't sure whether there was much chance for the bill's opponents to shape it or stop it.
"This is just one big set of ideological trophies. They have just put a dagger right in the heart of the Affordable Care Act," he said. "[There are] gifts to the key constituencies, the biggest players on the far right."
The Senate bill provides about $1.4 trillion in tax cuts.
Both bills provide deep, permanent cuts in the corporate tax rate, new tax reductions for pass-through businesses such as partnerships and temporary breaks for middle-income families. Both bills also reshape international tax law and raise taxes on upper-middle-class wage earners in high-tax states such as New York and New Jersey.
Republicans have several kinds of decisions to make as they try to build a compromise between the House and Senate tax bills. The House bill repeals the student-loan interest deduction; the Senate bill doesn't. The House bill sets the top individual tax rate at 39.6%; the Senate bill puts it at 38.5%. They could meet in the middle.
Among the most unexpected issues to arrive was the imbroglio over the corporate alternative minimum tax, a rarely used provision that had flown below the congressional radar. The change sparked a furious effort among American corporations over the weekend to reverse it.
"Everyone, very quickly, is worried," said Eric Solomon, co-director of the national tax office at EY LLP, whose firm was fielding queries from confused and baffled clients on Saturday. "People were surprised, and they're trying to figure out what it means for them."
The alternative minimum tax is a parallel tax system with low rates and few tax breaks. Under the present system, the corporate alternative minimum of 20% is rarely applicable to corporate filers, who end up paying a higher 35% tax rate and can have lower effective rates by claiming breaks that aren't affected by the AMT.
The AMT is designed to make sure companies and individuals can't use legal breaks to avoid all their taxes. Under the AMT, taxpayers are required to calculate what they owe under both tax systems and pay whichever is greater.
But the corporate rate is now proposed to be 20%, so the overhaul could drive many companies into the AMT -- and force them to lose some of their breaks in the process.
The biggest consequence could be the research credit, often used by manufacturers, technology firms and pharmaceutical companies. Under the credit, companies get money back from the government for what they spend on innovation, often for wages of scientists and engineers. Corporations will claim $10.3 billion in research credits in 2018, according to the congressional Joint Committee on Taxation.
"Research and development is the lifeblood of manufacturing," said Chris Netram, vice president for tax and domestic economic policy at the National Association of Manufacturers. "The NAM supports pro-growth tax reform, and is working with key policy makers to ensure the final bill does not inadvertently harm manufacturing."
Murray Energy Corp., an Ohio-based firm and the largest privately held U.S. coal-mining company, complained that the AMT decision and the Senate's tougher limits on interest deductions made a "mockery out of so-called tax reform." Robert Murray, the company's chief executive officer, said the Senate tax plan would raise his tax bill by $60 million.
The Senate kept both the individual and the corporate AMT. The list of disallowed breaks under the corporate AMT is even more complicated than it is for individuals.
Most corporations don't worry about the AMT. With a regular tax rate of 35% and a corporate AMT rate of 20%, almost all of them end up in the regular tax system.
The original Senate Republican plan set the regular corporate tax rate to 20% and repealed the corporate AMT. The last-minute amendment reinstated the corporate AMT and its 20% rate.
The tax bill that passed the House last month would eliminate the corporate AMT.
"Luckily, this is not the final bill," said Reuven Avi-Yonah, a tax law professor at the University of Michigan who expects Republicans to fix the problem in a House-Senate conference committee
Write to Richard Rubin at email@example.com
(END) Dow Jones Newswires
December 03, 2017 20:41 ET (01:41 GMT)