Senate Votes to Begin Tax-Overhaul Negotiations With House

The U.S. Senate voted Wednesday to start formal tax-bill negotiations with the House of Representatives as lawmakers began grappling with the delicate balance they must strike to advance final legislation through both chambers and to the president by Christmas.

Republicans are weighing a number of changes that would expand tax cuts and force offsetting adjustments.

Among the issues in play are allowing deductions for medical expenses and state income taxes, both of which were repealed in the House bill. In addition, lawmakers would prefer to repeal the individual and corporate alternative minimum taxes the Senate included at the last minute.

It isn't clear where they will go for money. As President Donald Trump suggested Saturday, the options include setting the corporate tax rate at 22% instead of 20%, though he mentioned a 20% rate Wednesday.

Under the budget Republicans wrote, the bill can't cut taxes by more than $1.5 trillion over a decade. That constraint, along with the narrow margins in the House and Senate, will shape the conference committee that will start meeting soon.

"We know we have $1.5 trillion and we know we have to simplify the code, " said Rep. Kevin Brady (R., Texas), the lead House negotiator. "So we've got some work to do."

Senate Republicans announced their conference committee members late Wednesday: Sens. Orrin Hatch of Utah, Mike Enzi of Wyoming, Lisa Murkowski of Alaska, John Cornyn of Texas, John Thune of South Dakota, Rob Portman of Ohio, Tim Scott of South Carolina and Pat Toomey of Pennsylvania.

Sen. Ron Wyden (D., Ore.), ranking member of the Senate Finance Committee, called the conference committee "nothing more than theater."

"It won't be a real effort to have an honest debate in the light of day, " Sen. Wyden said on the Senate floor. "The truth is, Republicans from the House and Senate are hashing out their differences right now behind closed doors. They're packing the bill with even more goodies and loopholes for special interests."

Mr. Brady and Senate Majority Leader Mitch McConnell (R., Ky.) both showed openness Wednesday to an idea pushed by some California Republicans. The House and Senate bills allow an itemized deduction of up to $10,000 in property taxes; the concept would let taxpayers use that amount for income or property taxes.

"That sounds like a kind of reasonable idea," Mr. McConnell said on the Hugh Hewitt radio show.

But Mr. Brady emphasized that the deduction wasn't the only way he is trying to address concerns from lawmakers in high-tax states. The rate and bracket structure, alternative minimum tax and family credits are all tools at lawmakers' disposal, he emphasized to reporters in the Capitol.

The House and Senate have different approaches on all of those features of the tax system and need to reach an agreement.

Rep. Devin Nunes (R., Calif.), a conference committee member from a rural part of the state, sounded less eager to address the state- and local-tax deduction issue, known as SALT, that his colleagues from wealthier Orange County are focused on.

"Well, we can always do better," Mr. Nunes said. "But I'll just say again, like I said many times, that this SALT issue is mainly for really, really rich people."

Rep. Kristi Noem (R., S.D.), a conference committee member, said she would push for an estate-tax repeal -- which occurs in 2025 in the House bill but never happens in the Senate version -- but didn't say if the issue would be a deal breaker for her. "I'm on the conference committee to build consensus on many, many different issues. But this is obviously a priority of mine, too." Ms. Noem said.

One of the most controversial ideas -- the House's repeal of the medical-expense deduction -- may not survive.

"That issue is being raised a lot by our lawmakers as very important," Mr. Brady said, describing conversations with House members pushing for the deduction to remain in some form.

Under current law, the deduction is available for households with medical expenses exceeding 10% of adjusted gross income. It is often used by people who are paying for nursing-home care and other extraordinary medical costs.

The Senate bill would temporarily expand the deduction by lowering the income threshold to 7.5% of adjusted gross income.

"I don't want to get ahead of myself," he said. "I know this will be an important discussion."

Mr. Brady also outlined another possible conflict with senators. The House bill addresses a number of tax breaks that expired at the end of 2016 or are set to lapse in future years, ending some and continuing others. They include incentives for renewable energy and investment in distressed areas.

The Senate bill is silent on most of those provisions, leaving them for a later "tax extenders" bill.

"I don't like the extenders process," Mr. Brady said of the regular ritual of extending narrow breaks and setting them to expire. "It's a horrible policy and process."

--Siobhan Hughes contributed to this article.

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

(END) Dow Jones Newswires

December 06, 2017 20:36 ET (01:36 GMT)