Tax Reform

Republicans Seek Major Tax Changes as Opposition Begins to Form

The bill offers big changes for business and individual taxes, including a measure to cut the corporate tax rate to 20%.

House Republican leaders began rolling out a tax bill on Nov. 2 that contains sweeping changes for business and individual taxes, including a measure to cut the corporate tax rate to 20%.

House Speaker Paul Ryan pledged fast action on the legislation, telling reporters he senses “ironclad” political will to revamp the U.S. tax code for the first time in 31 years.

The bill ran into opposition almost immediately on Nov. 2. It would cap the mortgage-interest deduction on new home sales at $500,000 -- a departure from the current cap of $1 million for couples filing jointly. The National Association of Realtors, which has been wary of the tax plan, said that measure “appears to confirm many of our biggest concerns.”

The president of a national small-business group blasted the bill, saying it “leaves too many small businesses behind” with a tax cut for partnerships, limited liability companies and other so-called “pass-throughs” that “does not help small businesses.” As a result, the National Federation of Independent Business won’t support the bill “in its current form,” said President Juanita Duggan.

Another provision that’s likely to provoke controversy would tax large university endowment income at 1.4%. That measure would apply to schools with assets of more than $100,000 per student. It would exempt small schools.

The bill would also impose a tax of as much as 12% on multinational companies’ accumulated offshore earnings -- a rate that’s higher than either President Donald Trump or Ryan have proposed. It would phase out the estate tax over years, more slowly than either of them would prefer.

The bill will include “no changes” to popular 401(k) retirement plans, according to a House memo about the legislation, and it wouldn’t repeal the Obamacare individual mandate. It would cut individual tax rates for millions of Americans, but not for earners making $1 million or more. Keeping the top rate at 39.6% won’t please conservatives who want across-the-board cuts.

The legislation won’t satisfy everyone, but it represents Trump’s last chance for a major legislative victory in his first year. To pass it by Christmas, as the president has called on Congress to do, lawmakers must prevail over a series of challenges with no real margin for error. The first test comes on Nov. 6, as the House Ways and Means Committee is scheduled to take up the bill.

Trump applauded the bill’s arrival, which will kick off a legislative sprint to be passed by the House this month. He cautioned against special interests attempting to derail the effort, which he said would deliver tax relief to middle-class Americans and businesses. “We are just getting started and there is much work left to do,” Trump said in a statement released by the White House.

The 2018 budget resolution approved by the House and Senate allows for tax legislation that would increase the federal deficit by $1.5 trillion over 10 years, before accounting for any growth that might result from the changes. Figuring out how to achieve the deep rate cuts that Trump, Ryan and others want while staying within that bright line has complicated the bill drafters’ task. Earlier this week, House officials postponed the legislation’s planned release by one day.

The bill that was released  may be rewritten over the weekend, at least in part -- though which provisions would change is unclear.

‘Bring Solutions’

House Ways and Means Chairman Kevin Brady, the Texas Republican who’ll manage the bill, said late on Nov. 1 that he may have a revised version in time for Monday’s hearing. “Are there some areas where we’ve asked people to bring solutions? Yeah,” he said.

The child tax credit would be increased to $1,600 from $1,000 per child under 17, with an additional $300 credit for each parent as part of a consolidated family tax credit. The credit had been a priority for Ivanka Trump, who had met with lawmakers in recent weeks to discuss it.

One key consideration involves a compromise that Brady offered on tax breaks for individuals in high-tax states: allowing individuals to deduct the cost of their state and local property taxes. That benefit would be capped at $10,000, and other state and local tax deductions currently allowed would be repealed. Brady said on Nov. 2 he’s still trying to work with GOP House members who have concerns about the measure.

 ‘One by One’

“We are close,” said Representative Tom Reed of New York on Nov. 1. “We are going to be able to solve that problem.”

One issue that may plague the bill: placing limits on a proposed tax cut for many businesses organized as partnerships, limited liability companies and other so-called pass-throughs. Currently, such companies pass their earnings through to their owners, who are taxed at their individual income rates -- which can be as high as 39.6%.

The bill would reduce the pass-through rate to 25% -- but limit the kind of income that would qualify. “Professional services” -- including doctors, lawyers, accountants and others -- wouldn’t automatically qualify for the rate.

Other business owners could chose one of two options: 1. Categorize 70% of their income as wages -- and pay their individual tax rate on it -- and 30% as business income, taxable at the 25% rate. Or  2. Set the ratio of their wage income to business income based on the level of their capital investment.

The guidelines are aimed at preventing abuse of the 25% rate -- such as high-earning individuals forming themselves into corporations to get a tax cut.

Trump and others have pitched the pass-through plan as a boon for small businesses -- but pass-throughs can be very large businesses in addition to mom-and-pop shops. Trump himself owns hundreds of limited liability companies, according to his federal financial disclosure.

Setting limits on the pass-through rate is a touchy issue for a number of lawmakers.

“I want to make sure the pass-through rate for small businesses is actually a pass-through rate for all businesses -- I’m hearing that may not be the case, and that is a problem,” said Representative Mark Meadows, a North Carolina Republican and the chairman of the House Freedom Caucus.

Earlier on Nov. 1, Meadows predicted a bumpy ride for the House bill, saying it would unleash dissent “like you’ve never seen.” Still, that doesn’t mean the effort will fail, he said.

“It may be a little messy, it may not be as fun as we would all have liked to have seen it be over the past few weeks,” Meadows said. “But we’re going to get it done, and failure is not an option.”

 By Anna Edgerton and Erik Wasson

 

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