Key takeaways on Senate Plan
· The Senate Finance Committee released a detailed summary of its tax reform proposal, following the release a week earlier of the House proposal. Although there are many similarities between the two proposals, there are also significant differences, which likely means there will be a complex legislative process ahead.
· Dealmakers will now have to navigate two sets of proposals, adding complexity to the deal environment.
· Both proposals significantly lower the corporate income tax rate to 20% and alter fundamental principles of the U.S. income tax system. For example, the proposals eliminate most itemized deductions, limit the deduction for interest expense, impose broad anti-base erosion rules, and alter the taxation of insurance companies and of non-U.S. earnings. The Senate proposal also includes radical changes to the taxation of deferred compensation that were dropped from a previous House proposal.
· Both proposals replace the current worldwide U.S. taxation system with a territorial system that taxes U.S. multinational corporations only on income related to the United States and impose a one-time tax on all existing foreign earnings. Both proposals also impose a new minimum tax on “excess” foreign profits, particularly those generated from intangibles.
By a strict party-line vote, with all 24 Republicans in favor and all 16 Democrats against, the House bill was moved out of committee. House Speaker Paul Ryan (R-WI) called the bill’s advancement to the full House “yet another critical step toward delivering real relief to the American people.” GOP leaders will need to win over noncommittal representatives from blue states potentially hard-hit by the state income tax deduction repeal to ensure that the bill is passed. As we reported last week, the House bill cuts the corporate rate from 35 percent to 20 percent, makes moderate reductions to household income rates, and changes some benefits (such as the deductions for mortgage interest and state and local taxes) while leaving others (like 401(k) plans) intact.
Some amendments were made to the House bill before it was advanced. One incorporates a 9 percent tax rate for the first $75,000 of taxable income of passthrough businesses earning less than $150,000. Other changes include allowing charities to participate in political activities and retaining the current credit for qualified adoption expenses. A proposed excise tax on repatriating multinational corporations’ foreign earnings was revised, a new tax on private universities’ endowments was raised, and the benefit of the carried interest tax break for investment managers was limited.
The Senate Finance Committee’s version of the Tax Cuts and Jobs Act was released late Thursday. In a key departure from the House measure, the Senate plan delays the cut in the corporate tax rate one year until 2019. The move is intended to help the overall plan meet a deficit limit to allow Senate passage by simple majority, without the need for any Democratic votes. Wall Street reacted negatively to the possible corporate delay, with major indices falling about half a percent. Other business incentives include an increase in Section 179 expense to $1 million, 100 percent bonus depreciation deduction for five years, and the reduction of the depreciable lives of buildings from 27.5 and 39 years to 25 years.
On the individual side, the Senate measure offers seven tax rates ranging from 10 to 38.5 percent, while the House had only four (12 to 39.6 percent). The top rate (in either bill) applies to singles earning over $500,000 and couples above $1 million. The Senate bill would keep the mortgage interest deduction cap untouched at $1 million (the House bill proposes $500,000) and would completely eliminate all state and local deductions (the House preserves a partial benefit for real estate taxes). The Senate retains the estate tax but doubles the amount of assets that may be exempted from the tax. The House bill, by contrast, proposes a complete repeal of the estate tax in six years.
Both chambers are also discussing the repeal of the Patient Protection and Affordable Care Act’s individual mandate, which could general revenue to pay for proposed tax cuts. On Tuesday, the Congressional Budget Office reported that repealing the mandate would shrink federal deficits more than $300 billion over ten years, although health insurance coverage would be reduced.
The Senate Finance Committee is expected to begin markup of its bill today. The two bills, if passed, will likely move to conference committee to reconcile differences. Republicans hope to pass tax reform legislation before Thanksgiving
Much more to learn from the differences and we will continue to follow it closely