(Bloomberg) – Senate Republicans narrowly approved the most sweeping rewrite of the U.S. tax code in three decades, slashing the corporate tax rate and providing temporary tax-rate cuts for most Americans.
The 51-49 vote -- achieved only after closed-door deal-making with dissident senators -- brings the GOP close to delivering a much-needed policy win for their party and President Donald Trump. Trump has promised to sign tax-cut legislation before the end of 2017.
Before any bill goes to Trump, lawmakers will have to resolve differences between the Senate bill and one the House passed last month, a process that could begin Monday.
The Senate bill includes a repeal of Obamacare’s mandate that most Americans have health insurance or pay a penalty. The House bill does not.
Although both versions share common topline elements, negotiations on individual provisions inserted to win votes, particularly in the Senate, may be protracted and difficult. The final product will end up being a central issue in the 2018 elections that will determine control of Congress.
Both measures would cut the corporate tax rate to 20% from 35% -- though the Senate version would set that lower rate in 2019, a year later than the House bill would. Also, the Senate bill, unlike the House version, would provide only temporary tax relief to individuals, ending tax cuts for them in 2026. Both bills are expected to add more than $1.4 trillion to the federal deficit over 10 years, before accounting for any economic growth. Senator Bob Corker of Tennessee, who had cited concerns over the bill’s effects on federal deficits, was the only Republican dissenter.
The bills are aligned on other provisions as well. For example, on the contentious issue of individual deductions for state and local taxes, the bills agree: They’d eliminate all but a deduction for property taxes, which would be capped at $10,000.
But they differ on the home mortgage-interest deduction; the House bill would restrict that break to loans of $500,000 or less with regard to new purchases of homes. The Senate legislation would leave the current $1 million cap in place.
And they differ -- narrowly -- on the tax rates they’d apply to multinational companies’ accumulated offshore earnings. The House bill would tax those profits at 14% for earnings held as cash and 7% for less-liquid assets. The revised Senate bill contains a lengthy section that has no direct mention of the rates, but a person familiar with the Senate plan said they’d be 14.5% for cash and 7.5% for less-liquid assets.
Senate Republican leaders muscled the sweeping legislation through the chamber less than two weeks after releasing the bill draft. Many GOP lawmakers, including Corker and Lindsey Graham of South Carolina, have expressed concerns that the party has little to show so far before next year’s congressional elections, after the collapse of an Obamacare repeal earlier this year and no action on issues ranging from immigration to infrastructure.
Republicans were able to bring the legislation to a vote using Senate rules that allowed them to approve it with a simple majority, therefore without any Democratic support. The GOP controls just 52 votes in the chamber, eight shy of what’s typically needed to move controversial measures that draw delaying tactics by opponents.
That narrow majority made it important for Senate leaders to try to hold every member’s vote; moderate Senator Susan Collins of Maine used that leverage to secure various concessions, including an agreement to enhance an individual deduction for large unreimbursed medical expenses through the end of next year. The House bill would eliminate that tax break.
Democrats decried the bill’s deficit impact and complained they were shut out of the process to help draft the measure. They cited research showing that the legislation primarily benefits the nation’s highest earners and business owners, and will bleed federal revenues in a way that hurts domestic programs.
“At a time of immense inequality, the Republican tax bill makes life easier on the well-off and eventually makes life more difficult on working Americans, exacerbating one of the most pressing problems we face as a nation -- the yawning gap between the rich and everyone else,” said Minority Leader Chuck Schumer of New York during debate on the bill.
‘Back of a Napkin’
Schumer noted that a set of last-minute revisions to the bill changed it in ways that had yet to be analyzed by the Joint Committee on Taxation, Congress’s official scorekeeper for the effects of tax legislation. “Is this really how Republicans are going to rewrite the tax code? Scrawled like something on the back of a napkin?”
Attention now shifts to a House-Senate conference committee -- a specially appointed, temporary panel that will be charged with hashing out the differences in the bills and preparing a final version for both chambers to consider. Party leaders will select a small group of lawmakers, likely from the House and Senate tax-writing panels in each chamber, who would then be approved by each chamber.
That work could start as early as Monday, with many high-stakes issues to be worked through. The deadline of Dec. 31 is an artificial one, though -- aimed partly at securing a victory well in advance of the 2018 congressional elections. Republicans would have until the end of 2018 before they lose their ability to clear final passage in the Senate without a filibuster.
Both bills share some key central elements: They both almost double the standard deduction for individual taxpayers while eliminating personal exemptions. They both allow companies to fully and immediately deduct the cost of their spending on equipment for five years. But the Senate version would slowly step down the expensing provision after the five-year period -- a feature that the House bill doesn’t provide for.
Yet there are many differences -- ranging from the taxation of business income to the amount set for the child tax credit -- and Senate negotiators may have the upper hand during talks. That’s because the wafer-thin two-vote majority in the Senate will make it harder to usher a final bill back through that chamber.
The House bill would consolidate the current seven individual tax brackets to four, leaving the top tax rate at 39.6%. The Senate bill would have seven brackets -- with lower rates, and a top rate of 38.5%. Studies have shown that many of the tax bill’s benefits would go to the highest earners -- and some middle-class taxpayers might actually pay more -- a finding that could impact the House-Senate talks.
Senators approved a 23% tax deduction -- subject to certain limitations -- on business income earned from partnerships, limited liabilities and other so-called pass-through businesses. The House version would create a 25% tax rate for such business income -- with restrictions on which businesses could qualify. Small businesses would get extra relief under the House legislation as well.
The House bill would also eliminate the estate tax, while the Senate version would limit the tax to fewer multimillion-dollar estates, but leave it in place. And after 2025, the limits would lift.
Under current law, the estate tax applies a 40% levy to estates worth more than $5.49 million for individuals and $10.98 million for married couples. The Senate bill would temporarily double the exemption thresholds. The House bill would double the exemption thresholds, and then repeal the tax entirely in 2025.