CONSISTENTLY DELIVERS

Dec 5, 2017

Tax Policy Update

PICTURE OF THE WEEK

Source: Chip Somodevilla/Getty Images

Senate Majority Leader Mitch McConnell (R-KY) has every reason to smile. In the wee morning hours of Dec. 2, the Senate passed, 51-49, the Tax Cuts and Jobs Act (H.R. 1). Every Democrat voted against the bill. They were joined by Sen. Bob Corker (R-TN), the lone Republican dissenter.

Despite having filed hundreds of amendments, senators voted on only eight of those measures; and out of the eight, only three were adopted:

  • Cruz #1852 – an amendment that would allow 529 savings plans to be used for elementary and secondary education, including tuition expenses at public, private, or religious schools.
  • Merkley #1856 – an amendment that would repeal an exception to the endowment tax.
  • Hatch-Murkowski #1618 (as amended) – this is the substitute amendment to H.R. 1, containing the full text of the Senate’s Tax Cuts and Jobs Act, as amended.

KEY MODIFICATIONS TO THE SENATE TAX BILL

On the evening of Dec. 1, Senate Majority Leader Mitch McConnell directly incorporated a series of GOP amendments into the tax bill. A copy of the modified bill that was being circulated just before the final vote contained several handwritten changes and strike outs.

Here are some of the GOP’s last-minute changes to the Senate tax bill:

 

Increase the repatriation rates to 14.5% (cash) and 7.5% (non-cash)

 

Raise the pass-through deduction from 17.4% to 23%

 

Reinstate the corporate AMT

 

Reinstate the individual AMT but raise the exemption amounts

 

Maintain the state and local tax deduction for property tax – up to $10,000

 

Extend and phase down 100% immediate expensing after 5 years. The phase-down schedule is as follows: 80%, 60%, 40%, 20%

 

Maintain medical expense deduction and revert to a 7.5% threshold for 2 years

 

Eliminate many of the tax administration provisions that were in the original bill

An official copy of the Senate tax bill, as amended and passed, can be viewed here.

Based on the Dec. 1 estimate by the Joint Committee on Taxation, the Senate bill would add about $1.45 trillion to the deficit.

SIDE-BY-SIDE: HOUSE AND SENATE TAX BILLS

The House and Senate are expected to go to conference this week for the Tax Cuts and Jobs Act (H.R. 1). The purpose of the conference is to resolve the differences between the House and Senate bills.

On Dec. 4, House leaders named the following lawmakers to serve on the House-Senate conference committee for H.R.1:

Republicans

Rep. Kevin Brady (TX) - conference chair

Rep. Devin Nunes (CA)

Rep. Peter Roskam (IL)

Rep. Diane Black (TN)

Rep. Kristi Noem (SD)

Rep. Rob Bishop (UT)

Rep. Don Young (AK)

Rep. Greg Walden (OR)

Rep. John Shimkus (IL)

Democrats

Rep. Richie Neal (MA) – ranking member

Rep. Sandy Levin (MI)

Rep. Lloyd Doggett (TX)

Rep. Raul Grijalva (AZ)

Rep. Kathy Castor (FL)

 

Business Taxation
Provision House Senate

Corporate Rate

Permanent, flat 20% corporate tax rate, effective immediately.

Permanent, flat 20% corporate tax rate starting after Dec. 31, 2018.

Carried Interest

3-year holding period requirement for qualification as long-term capital gain for partnership interests held in connection with the performance of services.

Same as House.

Cost Recovery 100% immediate expensing for 5 years Extends and phases down 100% immediate expensing after 5 years. Phase-down schedule is as follows: 80%, 60%, 40%, 20%.
Net Interest Expensing

Limitation on net interest expense deductibility to 30% of adjusted taxable income (i.e. EBITDA).

Limitation on net interest deductibility to 30% of adjusted taxable income (defined under Senate tax reform bill as EBIT, not EBITDA).

Net Operating Loss (NOL)

NOL permitted to offset 90% of taxable income; carryforward indefinitely.

NOL permitted to offset 90% of taxable income but drops to 80% in years beginning 2023.

Sec. 199 Repeal Same as House
WOTC Repeal No Provision
New Markets Tax Credit No additional allocations after 2017. No Provision
Wind & Solar Production Tax Credit Eliminates inflation adjustment for new wind facilities (i.e., reverts rate to 1.5 cents/kilowatt hour). No Provision
Investment Tax Credit Extends the investment tax credit to cover fiber optic solar, fuel cell, microturbine, combined heat and power system, small wind, and geothermal. No Provision
Nuclear Production Tax Credit Allocates remaining megawatt capacity available to qualifying nuclear facilities after 2021. No Provision
Bonds Repeals tax-exempt status for qualifying private activity bonds, advance refunding bonds, and tax credit bonds. Repeals tax-exempt status for advance refunding bonds.
Compensation No changes to nonqualified deferred compensation. Same as House
Alternative Minimum Tax (AMT) Repeal of corporate and individual AMT. Reinstates the individual AMT with higher exemption amounts. Reinstates the corporate AMT
Deemed Repatriation 14% rate on cash; 7% non-cash 14.5% rate on cash; 7.5% non-cash
 
Individual Taxation
Provision House Senate

Rates

4 Brackets: 12%, 25%, 35%, 39.6%

7 Brackets: 10%, 12%, 22%, 24%, 32%, 35%, 38.5%

Standard Deduction & Exemptions

Nearly doubles the standard deduction; repeals personal exemptions.

Same as House

Pass-Throughs 70/30 split between wage income and business income. Maximum rate of 25% on business income. 23% percent deduction for pass-through business income.
Child Tax Credit (CTC)

Expands CTC to $1,600 per qualifying child.

Expands CTC to $2,000 per qualifying child.

State and Local Tax (SALT)

Repeals SALT deduction for income and sales tax; maintains deduction for property tax up to $10,000.

Same as House

Mortgage Interest Deduction Deduction for existing mortgages will be preserved but will cap deduction for newly purchased homes at $500,000 and disallow deduction for mortgages on second homes. No Provision
Tax Preparation Service Deduction Repeal Same as House
Education Repeal of the student loan interest deduction and the Sec. 127 employer-provided educational assistance credit. No Provision
529 Plans Allows tax-free rollovers from Coverdell accounts into section 529 plans. Expands section 529 college savings accounts to cover K-12 expenses of up to $10,000 per year. Expands section 529 college savings accounts to cover K-12 expenses of up to $10,000 per year. This includes homeschooling.
Estate & Gift Tax Doubles the current estate and gift exemption of $5 million to $10 million. Repeals the estate and generation-skipping taxes after 2023. Lowers gift rate to a top rate of 35%. Doubles the current estate and gift exemption of $5 million to $10 million through 2025. Maintains top gift tax rate at 40%.
Savings & Retirement No mention of Rothification. No mention of Rothification
Medical Expense Deduction Repeal Maintains medical expense deduction and reverts to a 7.5% threshold for two years.
 

GOVERNMENT FUNDING

Congress must pass a spending bill by Dec. 8 to avoid a government shutdown. House Republicans have introduced a short-term funding patch (so-called “CR”) that runs through Dec. 22 to give lawmakers more time to come to an agreement to fund the rest of the fiscal year.

Members of the House Freedom Caucus are pushing Speaker Paul Ryan to extend the CR through Dec. 30 because they do not believe that a two-week extension would give Republicans enough time to secure a favorable spending deal.

The House Rules Committee has postponed taking action on the CR until the GOP can come to an agreement on the duration of the CR. Despite this, the House is expected to vote on the CR this Thursday. The CR also currently includes language to provide temporary funding for the Children’s Health Insurance Program.


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