House, Senate Work to Unify Corporation-Friendly Tax Plans

Work has begun on Capitol Hill to reconcile differences in tax bills recently passed by the House and Senate. Lawmakers expect to have a final bill that can pass both chambers by year’s end.

Both bills provide about $1.4 trillion in tax cuts over a decade. They include deep, permanent cuts in the corporate tax rate, new tax reductions for pass-through businesses such as partnerships, and temporary breaks for middle-income families. Both bills reshape international tax law and raise taxes on upper-middle-class wage earners in high-tax states such as New York and New Jersey.

Republicans have room to maneuver but not much. The House passed its bill 227-205 on November 16, and some who voted yes then said they had concerns but wanted to move the process forward. The Senate passed its version 51-49 in the wee hours of December 2, and two flipped votes would kill the effort.

Lawmakers have a handful of key issues to resolve to reach a compromise on the House and Senate versions.

Pass-through tax. The House bill benefits passive owners of partnerships and other firms that pay taxes through their owners’ returns. It offers limited breaks for professional services firms such as lawyers and consultants.

The Senate bill has a broader deduction that is more generous to active business owners and professional services firms that earn under $250,000 for individuals and $500,000 for married couples.

Corporate tax rate. Both bills set the corporate tax rate at 20 percent. The Senate delays that start date until 2019. President Trump reopened the discussion by saying he’d accept 22 percent as a corporate tax rate.

Corporate alternative minimum tax (AMT). Senate Republicans, in a rewrite of their bill hours before the vote, and in an effort to manage the federal deficit, returned the AMT to their plan.

The House bill repealed the AMT, which is a separate tax calculation used to force businesses to pay at least a base level of federal taxes. Few businesses pay it, because their regular rate is higher, but with the new corporate rate at 20 percent, it’s likely that more businesses—perhaps most—would pay the AMT rate.

In the days since the vote, analysts and executives realized that keeping the AMT may create a tax system with unintended consequences. Businesses may be less likely to pursue tax breaks for things like research and development, and it could also undercut incentives to put intellectual property in the U.S.

International tax rules. Both bills make major changes to the rules affecting U.S. companies’ foreign earnings and the rules for payments from U.S. companies— and U.S. subsidiaries of foreign companies—to related foreign firms. The architecture of the provisions is somewhat different.

Individual tax rates. House Republicans have a four-bracket structure and a top tax rate at 39.6 percent. Senate Republicans kept seven brackets but lowered the top rate to 38.5 percent.

Sources: Wall Street Journal, Vox