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The Senate Finance Committee markup of the "Tax Cuts and Jobs Act" continued for a third day (November 15, 2017), with a walk-through of Chairman Orrin Hatch's (R-UT) modification to his Chairman's Mark that includes what is effectively repeal of the Affordable Care Act's (ACA) individual insurance mandate by reducing the tax penalty to zero beginning in 2019. The modification would also retain the permanent 20% corporate tax rate, sunset individual provisions after 2025, make pass-through provisions more generous, and tighten international anti-base erosion provisions in future years.

The modification reflects the dual goals of increasing the political appeal of the package and adhering to a budget reconciliation rule precluding any title of the tax bill from adding to the deficit beyond the 10-year budget window. Some Senate Republicans and President Trump had been advocating for inclusion of the individual mandate repeal, which would provide $318 billion over 10 years in revenue for the tax plan.

In addition to making the entire individual tax title expire after 2025, other changes in the modification that address revenue needs include raising more taxes from corporate provisions in the mark in the latter years and adding new provisions for individuals and businesses that kick in towards the end of the 10-year budget window.

Committee Democrats objected to the lack of time to review the modification and lack of formal assessments of the bill. Consideration of amendments began this evening, and many were focused on the effect of the individual mandate repeal. Amendments defeated on 12-14 party-line votes included those by:

— Ranking Member Ron Wyden (D-OR) to require a hearing on the impact of the individual mandate repeal at least 72 hours prior to a vote

— Wyden to require a complete analysis by the Joint Committee on Taxation (JCT) of the impact of the bill to be publicly available for at least 72 hours prior to a vote

— Wyden to require certification by JCT and the Congressional Budget Office (CBO) that no proposal in the bill would cause loss of health care coverage, increased premiums or increased taxes on average Americans

— Senator Michael Bennet (D-CO) to provide that there can be no cuts to Social Security, Medicare or Medicaid under PAYGO rules if higher revenue from tax reform does not materialize for three straight years

— Senator Bob Casey (D-PA) to ensure access to health coverage for individuals with disabilities

— Senator Debbie Stabenow (D-MI) to require certification that the bill will not affect health costs or coverage

— Senator Ben Cardin (D-MD) to snap back corporate tax reductions unless there is certification that mental health and substance abuse coverage has not been reduced

— Senator Tom Carper (D-DE) to prevent a reduction in access to or increase in cost of care for veterans;

— Casey to require a hearing on any provision over $1 billion in cost

— Senator Sherrod Brown (D-OH) to allow a deduction for individual moving expenses

Wyden's amendment to gauge Senate support for H.R. 1, the House bill, was defeated on a 0-26 vote. Brown's amendment on Patriot employers, which would receive a tax credit up to $1,500 per employee for maintaining headquarters in the United States and paying fair wages and benefits, was ruled non-germane.

The markup is scheduled to resume at 10 a.m. on Thursday, November 16.

Boosting middle class provisions

The modification seeks to make benefits more generous to the middle class by increasing the child tax credit to $2,000 (from $1,650 previously proposed), as well as reducing some proposed income tax rates:

— The proposed 22.5% tax rate was reduced to 22%
— The proposed 25% tax rate was reduced to 24%
— The proposed 32.5% tax rate was reduced to 32%

Chairman Hatch said this morning that the modification represents a significant improvement over the original mark and addresses concerns of members on both sides of the Committee. The alterations to the mark are important, but are not sea changes, Hatch said, and "the core of the mark remains the same." The Chairman said he wants to complete consideration on Thursday but acknowledged that it could go longer.

Some provisions from the mark were struck under the modification, including the nonqualified deferred compensation provision that would have subjected compensation to taxation when it vests, and provisions related to the determination of worker classification and information reporting requirements. Other provisions were added. As is customary in the Finance Committee, the Chairman's Modification incorporates some of the 355 amendments submitted by Committee members over the weekend.

International tax

The modification would reduce the deduction for global intangible low-taxed income from 50% to 37.5% for tax years beginning after 2025. The deduction for foreign-derived intangible income would be reduced from 37.5% to 21.875% for tax years beginning after 2025. The proposed tax on base erosion payments set at 10% under the Chairman's Mark would be increased to 12.5% for tax years beginning after 2025. These changes would generate significant savings during 2026 and 2027 compared to the Chairman's Mark.

The modification would also make a number of changes and clarifications to the deemed repatriation tax that acts as a transition to the new territorial tax system including, among other things, allowing taxpayers to preserve net operating losses (NOLs) and opt out of using them for purposes of the transition tax.

Pass-throughs

The proposed 17.4% deduction on qualifying pass-through income would be provided to pass-through businesses on income from services for taxpayers with taxable income up to $500,000 for joint filers and $250,000 for individuals (up from $150,000 and $75,000, respectively, under the original mark). Additionally, taxpayers with income up to those levels would be exempt from the W-2 wage limitation that otherwise might limit taxpayers from obtaining the full benefit of the deduction. Chairman Hatch announced that the changes had won the bill's endorsement from the National Federation of Independent Business.

Business provisions

The limitation on deductibility of net interest expense under the Chairman's Mark, which would generally disallow net business interest expense deductions that exceed 30% of adjusted taxable income, is changed to allow farming businesses to elect to not be subject to the limitation, but such businesses would have to utilize alternative depreciation rules. In addition, "qualified property" placed in service after September 27, 2017, that is eligible for 100% expensing through until 2022 would include qualified film, television and live theatrical productions.

The modification tightens the proposed NOL deduction limitation of 90% of taxable income for losses arising in tax years beginning after 2017 to 80% of taxable income for tax years after 2023. NOL carrybacks would be repealed under the mark except for farming businesses, but the modification would allow NOLs of property and casualty insurance companies to be carried back two years and carried over 20 years to offset 100% of taxable income in such years.

The modification adopts a provision from former House Ways and Means Committee Chairman Dave Camp's (R-MI) 2014 tax reform bill requiring research or experimental expenditures to be capitalized and amortized over five years (15 years in the case of expenditures attributable to research conducted outside the United States) for amounts paid or incurred in tax years beginning after 2025.

The modification would add a CRAFT Beverage Modernization title that makes a number of changes affecting the tax treatment for the makers of beer, wine and spirits. It would exclude the aging period for those products from uniform capitalization rules, meaning producers could deduct interest expenses attributable to a shorter production period, effective for interest costs paid or incurred after December 31, 2017.

The proposal would lower the rate of tax on beer to $16 per barrel on the first six million barrels brewed by the brewer or imported by the importer. Beer brewed or imported in excess of the six million barrel limit would continue to be taxed at $18 per barrel. Small brewers would be taxed at a rate of $3.50 per barrel on the first 60,000 barrels domestically produced, and $16 per barrel on any further barrels produced.

A tiered excise tax rate would be provided for distilled spirits of $2.70 per proof gallon on the first 100,000 proof gallons of distilled spirits, $13.34 for all proof gallons over that amount but below 22,130,000 proof gallons, and $13.50 for amounts thereafter. In addition, distillers would be able to transfer spirits in approved containers other than bulk containers in bond without payment of tax. The provisions would expire for tax years beginning after December 31, 2019.

The changes and expansions of the Section 162(m) $1 million employer deduction limit that applies to compensation paid to top executives of publicly traded companies under the mark would be subject to a transition rule that, in part, provides that the proposed changes do not apply to any remuneration under a written binding contract that was in effect on November 2, 2017.

The mark's limitation on the deduction by employers of expenses for fringe benefits would be modified to disallow an employer's deduction for expenses associated with meals provided for the convenience of the employer on the employer's business premises, or provided on or near the employer's business premises through an employer-operated facility that meets certain requirements.

Other individual provisions

The modified mark drops a provision in the original Chairman's Mark that would have barred individuals who have over $500,000 in wages from making catch-up contributions to their qualified 401(k) plan in the following year. Currently, individuals age 50 or older can make catch-up contributions up to $6,000. The provision would have raised $500 million over 10 years.

The modified mark would increase contribution limits to ABLE accounts that are intended to benefit disabled individuals, and make the contributions eligible for the saver's credit. It would also allow rollovers between qualified tuition programs and qualified ABLE programs.

The modification also includes a new provision that would allow employees to exclude from income grants of stock that are not readily tradable on any public exchange.

The above-the-line deduction for teacher expenses, which would be repealed under the House tax bill, would be doubled under the modification to $500.

Senator Rob Portman (R-OH) noted as a priority of his the modification's provision to include, within the exclusion on student loan discharges, those on account of death or permanent disability of a student.

"Revenue-dependent repeals"

The modification's proposed NOL deduction limitation, provision on meals provided for the convenience of the employer, reduced international tax deductions, and requirement to capitalize and amortize research or experimental expenditures over five years would be repealed if cumulative aggregate on-budget Federal revenue from all sources for the period beginning October 1, 2017, and ending September 30, 2026, exceeds $27.487 trillion by an amount greater than or equal to $900 billion.

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Contact Information For additional information concerning this Alert, please contact:   Washington Council Ernst & Young    • Any member of the group, at (202) 293-7474.