Tax bill raises red flags for Senate GOP
The House GOP tax-reform package has put Senate Republicans in a tough spot, much like the House-passed ObamaCare repeal bill did earlier this year.
The legislation is expected to pass the House, starting a tougher battle in the Senate, where Republicans control 52 seats and can’t pass a bill if they suffer more than two defections and Democrats remain unified.
At least a half-dozen Senate Republicans have already raised concerns about various proposals in the tax measure, setting the stage for arduous negotiations in the upper chamber.
Senate GOP leaders have assured their colleagues that the Senate Finance Committee will write its own bill and urged them to withhold judgment on the House measure.
“They’ve told us the House bill is just a shell and we’ll have our own bill. They’ve asked to hold off on commenting and to not pick it apart,” said a Republican senator summarizing the instructions that Senate Majority Leader Mitch McConnell (R-Ky.) gave during a Thursday lunch meeting.
The House Ways and Means Committee unveiled its tax bill Thursday morning. It quickly came under fire for setting a new tax rate for pass-through businesses and for limiting the mortgage interest deduction to the first $500,000 of debt.
Sen. Ron Johnson (R-Wis.) is not happy with the formula the House bill sets for taxing pass-through businesses, which under current law pay taxes at the higher rates that individuals now pay.
The House bill would count 70 percent of a pass-through business’s revenue as wages, taxed at the individual rate, with the remaining 30 percent taxed as a return on capital at a new rate of 25 percent.
But Johnson argues that small businesses will wind up paying a blended rate of 35 percent, well in excess of the 20 percent tax rate the House bill sets for big companies classified as C-corporations.
“One issue I know that has to be fixed is the whole issue with pass-throughs,” said Johnson, who called the House language on small business taxation “completely unacceptable.”
Johnson, the former CEO of a plastics company, said his House colleagues don’t understand the impact of the proposed rate on business.
“What you really have is a blended rate of about 35.5 percent. That’s a 15-percent differential” between corporate and small-business rates, he said.
Juanita Duggan, president of the National Federation of Independent Business, on Thursday said the House bill “leaves too many small businesses behind.”
Another provision raising red flags in the Senate is a proposal to limit the mortgage interest deduction to the first $500,000 of mortgage debt; the threshold is now set at $1 million. The new standard would not be retroactive, applying only to newly purchased homes.
The National Association of Home Builders has panned the House bill, saying it gives large corporations a tax break at the expense of middle-class homeowners.
Sen. Tim Scott (R-S.C.), a member of the Finance Committee, says mortgages over $500,000 are common in expensive housing markets in California, New York and the District of Columbia.
“I prefer that it be higher,” he said. “In California, New Jersey, D.C., the definition of the average house is going to be significantly higher [in price] with a whole lot less square footage.”
“I want to make sure that we’re not penalizing those folks who live in places with high valuation which leads to higher loan values,” Scott said.
Senate Finance Committee Chairman Orrin Hatch (R-Utah) said of the House proposal to lower the mortgage interest tax deduction limit, “I’m not sure that is going to fly.”
But whittling away at the offsets that pay for the bill is going to draw scrutiny from fiscal hawks such as Sens. Bob Corker (R-Tenn.) and Jeff Flake (R-Ariz.), who want to make sure the estimated cost of the bill isn’t kept in check with accounting gimmicks.
“I don’t want to balloon the deficit,” Flake said.
Two key middle-class tax credits in the House bill, the non-child dependent tax credit and the family-flexibility credit would phase out after five years to reduce the projected cost.
A major business tax break that would allow companies to immediately claim 100 percent expensing for capital investment would also sunset in five years.
Skeptical lawmakers are questioning how realistic that timeline is, as there would be intense pressure to renew the popular tax credits.
Senate Republicans are also raising concerns over the new tax brackets set up by the House bill.
Some GOP members, such as Sens. David Perdue (Ga.), Steve Daines (Mont.), Lisa Murkowski (Alaska) and Susan Collins (Maine), have balked at raising the rate for the lowest income bracket from 10 percent to 12 percent.
While taxpayers in the lowest bracket would be protected from having to pay more in taxes by the doubling of the standard deduction, these senators worry about the “optics” of raising the rate for the lowest bracket while slashing rates for corporations and wealthy individuals.
Other GOP senators aren’t happy with the amount of tax relief in the bill for the middle class, calling it inadequate.
“I still think we need to work the brackets and the rates a little lower for those in the middle,” said Sen. Rand Paul (R-Ky.).
Paul noted that people earning up to $416,700 in the current 33 percent tax bracket would be kicked up to the 35 percent bracket under the House proposal.
He wants to add language that would repeal ObamaCare’s individual mandate requiring people to purchase health insurance, which would generate an additional $300 billion in revenue.
“I think there’s some movement on the Senate side. We talked about it at lunch again today and there is some sentiment toward doing this,” Paul said.
Sen. Tom Cotton (R-Ark.) endorsed the idea last weekend when he tweeted that, “repealing mandate is itself a tax cut for working families!”
Sen. Ben Sasse (R-Neb.), meanwhile, on Friday raised alarm over a provision in the House proposal that would eliminate the tax credit for adoptions.
“Being pro-life means being pro-adoption. Congress must remember this as we work through the details of tax reform in the coming weeks,” Sasse tweeted.
Paul and other Senate Republicans are also grumbling over the House proposal to keep the top tax rate of 39.6 percent in place for individuals who earn more than $500,000 or couples who earn more than $1 million.
“We should bring all rates down,” Paul said. “The top one percent pay a third of the income tax, maybe 40 percent of the income tax. So if you really want to return money to the private economy, you have to be less focused on who gets what money.”
Asked about keeping the 39.6 percent for the wealthiest taxpayers, Scott said, “I can’t say that I’m OK with it yet.”
Other senators, however, such as Collins and Perdue, have voiced support for keeping the highest rate in place for the nation’s wealthiest individuals and families.
Unlike the health-care debate, the Senate will unveil its own tax plan next week instead of waiting for the House to pass its bill.
Senate Republican Conference Chairman John Thune (S.D.), a member of the Senate Finance Committee, said he and other members of the tax-writing panels are trying to hammer out agreements on small business tax rates and other controversial issues.
“We’re still kind of working through the rate structure over here and we’ll see where we end up,” he said.