EVAN HOROWITZ | QUICK STUDY
Depending on where you look, the Republican tax plan is either rushing ahead, or beginning to stall. The House of Representatives on Thursday passed its version, but in the Senate, opposition is starting to bubble, with Senator Ron Johnson announcing Wednesday that he could not support the chamber’s current bill — and others expressing strong reservations.
There is a lot of wrangling to do, and many contentious issues to resolve, before this bill can become law. True, the House and Senate share a general commitment to cutting the corporate tax rate, paring back the estate tax, providing targeted relief for middle-class taxpayers — and generally pursuing a trickle-down approach designed to boost the economy by letting businesses keep more money.
But behind this veneer of consensus lies a number of real divisions. Here is a rundown of the key differences that will need to get resolved in the weeks and months ahead.
Republicans pledged at the beginning of this process not to increase the deficit by more than $1.5 trillion over 10 years. Trouble is, the cuts they want cost a lot more. So to compensate, they’ve had to raise money by eliminating deductions and tweaking other rules.
The House took a broad approach, eliminating or capping a suite of popular deductions for things like mortgage interest, property taxes, medical expenses, and student debt. Meanwhile, the Senate focused more directly on the deduction for state and local taxes (called SALT), eliminating it completely rather than just narrowing it, as the House preferred.
Finding a compromise won’t be easy. Several House members have come out strongly against the idea of eliminating SALT, which makes the Senate plan a nonstarter. But the multipronged House approach has a political downside; each deduction has its own interest group, which would mean pushback on multiple fronts.
Senators face an additional hurdle. Their tax bill can’t add anything to the deficit after 10 years; otherwise they’d lose the ability to pass the bill with just 50 votes and leave themselves open to a Democratic filibuster.
To meet this requirement, the Senate bill is set up to largely expire in 2025. After that, the cut to the corporate rate will stay in place, but individual rates mostly snap back to current rules.
House leaders have mostly ignored this challenge, but if they want their tax bill to have any chance in the Senate, they’ll have to accept this long-term reality.
Both the House and Senate want to introduce a “territorial” tax system, where companies only pay taxes on profits earned in the United States. That’s the norm around the world, but it gives multinational firms a huge incentive to make it seem like their money is being made overseas.
There are many ways to mitigate this risk, but they require careful regulation and diligent oversight. So far, it’s not clear either bill meets this challenge. Which means the bigger challenge isn't yet about finding a compromise but addressing concerns among tax experts worried about the risk of creating new opportunities for tax avoidance.
Most businesses don’t actually pay corporate taxes. Approximately 95 percent are pass-through operations, where owners divvy up profits like salaries and report them on individual income tax filings. That includes businesses big and small, from private equity first to independent contractors.
One of the original goals of the Republican plan was to lower the top tax rate for such businesses to 25 percent, down from the current 39.6 percent. But this has proved quite expensive and prone to abuse (because it encourages some workers to pretend they are pass-through businesses in order to lower their tax bill).
Both the House and Senate have pared back these plans, but that’s now a political problem. Diminished cuts for pass-through businesses is the big reason Johnson opposes the bill.
Earlier this week, Senate leaders announced that they would try to repeal the requirement for all Americans to purchase health insurance — saving money by reducing the government support that helps people buy coverage.
The savings are substantial, amounting to approximately $340 billion over 10 years. With those extra billions of dollars, Senate Republicans were able to meet their deficit requirements and also provide additional tax relief for families with children.
But adding health reform to a tax bill brings new political risks, making hospitals, doctors, and insurance companies the newest members of the coalition organizing to oppose this bill, whose opponents already include universities, nonprofits, and homebuilders.
All it took to kill the Republican health care plan was a handful of dissenting senators. And it’s possible tax reform will meet the same fate.
Remember, the House actually passed a bill to repeal and replace the Affordable Care Act — just as it’s planning to pass a tax bill this time around. But that may be the easy part. Looking ahead, the Senate will not only have to pass its preferred tax bill, but also negotiate with the House and accept a joint version bound to include some hard-to-swallow House priorities.
Success isn’t impossible — betting markets still give Republicans pretty good odds. But it will take time to iron out all these differences.
Fortunately for Republicans, time isn’t really of the essence. They might have set themselves a tight December deadline, but they can get an extension if necessary, working through the early months of 2018 to negotiate, compromise, and finalize this high-priority bill.
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