This week (November 20-24)

Congress: The House and Senate are out of session for Thanksgiving. The next Senate vote is set for Monday, November 27.

This Week in Tax Reform will be published on Wednesday, November 22 next week in light of the Thanksgiving holiday.

Last week (November 13-17)

Tax reform bills passed in House, Senate Finance: Separate tax reform bills were approved by the House and in the Senate Finance Committee on November 16, capping a whirlwind two weeks in Congress as Republicans aim to deliver by the end of 2017 the first overhaul of the US tax system in three decades. The bills, both titled the "Tax Cuts and Jobs Act," adhere to the same basic tax overhaul framework that was negotiated for months by GOP congressional leaders and the White House, but contain significant differences that will need to be resolved in a final bill sent to the President for his signature. "After years of work, the House and Senate both took bold action this week and are the closest we have been since 1986 to passing comprehensive tax reform legislation that will dramatically improve the lives of all Americans," House Ways and Means Committee Chairman Kevin Brady (R-TX) said November 17. "I look forward to continuing our work together in the weeks ahead and sending tax reform to President Trump's desk this year." Both bills would the lower the statutory corporate tax rate to 20%, move to a territorial system with a transition tax on accumulated foreign earnings, cut individual tax rates, and eliminate or limit many current tax benefits to keep the net cost of the plan below $1.5 trillion/10 years. The Senate Finance Committee version of the bill delays the corporate rate reduction until 2019, eliminates the state and local tax deduction, and takes different approaches on anti-base erosion and pass-through taxation than the House. The bills also include different individual tax rates and income brackets.

Controversy within the GOP was minimal during consideration in both of the tax-writing committees — where members had changes incorporated into revisions but did not publicly challenge the chairmen — and on the House floor. Republicans remain intent on swiftly enacting a bill. Full Senate consideration presents additional challenges, however. Budget reconciliation is more of a factor there, particularly the Byrd Rule requirement that no title of the tax bill add to the deficit beyond the 10-year budget window. Reconciliation will allow a tax bill to pass the Senate with the votes of as few as 50 senators (with the Vice President breaking the tie) — as opposed to the 60-vote filibuster threshold — but with 52 Senate seats, Republicans can lose the votes of only two members. Senate floor consideration is planned for the week after Thanksgiving.

House vote: The November 16 House vote on the "Tax Cuts and Jobs Act" (H.R. 1) was 227-205. A lengthy House Rules Committee meeting late November 14 rehashed many of the same arguments from the Ways and Means markup a week earlier, but did not result in any changes to the bill and, by virtue of a closed rule, did not allow for amendments on the floor. The vote followed a House Republican Conference meeting address from President Trump. The bill would repeal the deductibility of state and local income and sales tax and cap the property tax deduction at $10,000, changes that continued to draw opposition from members representing affected states. All but one of the 13 Republicans voting against the bill were from New York, New Jersey, or California. During a post-vote news conference, House Majority Whip Steve Scalise (R-LA) said, "Today is a great win for the American people. Now the Senate gets to do their job and finally go to a conference committee, where we pass a bill by the end of this year and put it on President Trump's desk … " Speaker Paul Ryan (R-WI) said, "This country has not rewritten its tax code since 1986. The powers of the status quo in Washington are so strong. Yet 227 men and women of this Congress broke through that today."

Senate Finance markup: The Senate Finance Committee approved the modified version of Chairman Orrin Hatch's (R-UT) mark of the bill on a party-line 14-12 vote late November 16 after a four-day, at-times contentious, partisan markup. None of the dozens of Democratic amendments, many intended to tilt benefits toward the middle class, were approved. Near the end of the markup, Senator Sherrod Brown's (D-OH) assertion that the bill is for the benefit of the rich was met with resentment by Chairman Hatch, who said Democrats overplay such claims and that he has devoted his lengthy career to working "for people who don't have a chance." The only amendments adopted to the mark were a Hatch modification released late November 14 and a manager's amendment offered just prior to the final vote. The modification reflected the dual goals of increasing the political appeal of the package and providing revenue to comply with reconciliation rules. It added what is effectively repeal of the Affordable Care Act's (ACA) individual insurance mandate by reducing the tax penalty to zero beginning in 2019, which would provide $318 billion over 10 years in revenue for the tax plan. The modification increased the child tax credit under the plan to $2,000, reduced proposed rates for middle class taxpayers — the 22.5% rate to 22%; 25% to 24%; and 32.5% to 32% — and extended the 17.4% deduction for pass-through businesses to income from services for taxpayers with taxable income up to $500,000 for joint filers and $250,000 for individuals (up from $150,000/$75,000 in the original mark).

However, the modification also sunset the plan's individual tax provisions after 2025 and trimmed the benefits of some corporate provisions beginning in the latter years of the budget window, including by, after 2025, reducing deductions for global intangible low-taxed income and foreign-derived intangible income, and increasing the proposed tax on base erosion payments. Other provisions were added, including a CRAFT Beverage Modernization title and requiring that research or experimental expenditures be capitalized and amortized over a 5-year period (15 years in the case of expenditures attributable to research conducted outside the United States) for amounts paid or incurred in taxable years after 2025.

The modification reduced the mark's net operating loss deduction limitation of 90% of taxable income to 80% for taxable years after 2023, and the November 16 manager's amendment accelerated that to taxable years after 2022. The manager's amendment also added, with regard to the cost basis of specified securities, an exemption for regulated investment companies from the first-in first-out rule; and a new requirement for corporate taxpayers that pay dividends to shareholders, to report the total amount of dividends paid during the taxable year and the first 2 1/2 months of the succeeding year. Similar to the House bill, the amendment would impose a three-year holding period requirement for qualification as long-term capital gain with respect to certain partnership interests received in connection with the performance of services. As is tradition in the Finance Committee, the markup was conducted on a conceptual basis, meaning legislative text is not yet available. The modification and manager's amendment are at the following link, along with other materials.

The staff of the Joint Committee on Taxation's revenue estimate of the reported bill (JCX-59-17) can be found here.

Individual mandate repeal: Some Senate Republicans and President Trump had been advocating for inclusion of the individual mandate repeal. The combination did not appeal to everyone, however. Senator Susan Collins (R-ME), who has long been a key Senate moderate vote, on MSNBC November 15 questioned the wisdom of adding the mandate repeal as both a political and policy matter. "Health care is such a complex issue, and to pull one section out of the Affordable Care Act without any kind of replacement … and put it into a very complex tax bill does not make sense," she said. Collins said she wouldn't make a final decision on the tax bill without looking at all the provisions, and noted that it "is still a moving target." She signaled that her support is less likely given the inclusion of the individual mandate repeal, but said she supports tax reductions and tax reform. "We have haven't overhauled the tax code since 1986 and we do need to provide tax relief to boost our economy and help our working families," Senator Collins said.

Repeal of the individual mandate was not added to the House bill despite some interest in doing so. Ways and Means Chairman Brady said during the Rules Committee meeting that he is open to its eventual inclusion. Asked during a November 14 Fox News Town Hall event why individual mandate repeal is not in the House tax bill, Speaker Ryan said, "We didn't want to complicate tax reform, make it harder than it otherwise would be." He said House Republicans "want to see the Senate go first and see if they can get that done, and then we'll discuss whether or not it gets included in the end." Ryan has said a House-Senate conference would follow Senate passage of its tax bill.

Repeal of SALT deduction: Ways and Means Chairman Brady and Senate Majority Leader Mitch McConnell (R-KY) agree that the complete elimination of the state and local tax deduction currently in the Senate bill cannot pass the House. On Bloomberg TV November 14, Chairman Brady said he made a commitment to House members for a state and local property tax deduction up to $10,000 and that will be in the final bill to be voted on by the House. During a Wall Street Journal event November 14, Senator McConnell said he did not think complete repeal of the state and local tax deduction "could possibly pass the House." Senator Collins said she is also "very concerned about the deduction being eliminated for state and local taxes."

Pass-through concerns: Senator Ron Johnson (R-WI), who is not a member of Finance but sits on the Budget Committee — which is slated meet prior to Senate floor action not to change the tax bill, but pair it with a separate measure from the Senate Energy and Natural Resources Committee — raised objections to how pass-through businesses are faring in tax reform. During a November 16 CNN interview, Senator Johnson said President Trump had called him to propose working together to address his concerns. He said, in his view, neither the House nor the Senate version honored the 25% pass-through rate proposed in the September framework from congressional and Administration negotiators. "I want more tax relief on the business side to flow through pass-through industries, because I really do believe they are the true engine of economic growth," he said.

Quote of the Week

"Excited to be heading home to see the House pass a GREAT Tax Bill with the middle class getting big TAX CUTS!" — President Trump, November 13

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