Politics

The Unkindest Cut: How to Pay for Tax Overhaul Sweeteners

Hundreds of billions of dollars needed to pay for sought-after changes

Ways and Means Chairman Kevin Brady is among the top negotiators in the House-Senate conference committee on the GOP’s tax overhaul. (Tom Williams/CQ Roll Call)

As the House and Senate prepare for a conference committee on the Republican tax overhaul, the two chambers face the challenge of reconciling stark differences, and where to find billions of dollars they may need to smooth things over. 

Among the most significant discrepancies are the treatments of pass-through businesses, the estate tax and the corporate alternative minimum tax. House Republicans are also considering a provision to further scale back the proposed trimming of the state and local tax deduction.

While there are other notable differences — such as the individual income tax brackets — many differences are not considered deal breakers.

But the most significant ones will be difficult and expensive to negotiate, with a possible overall price tag in the hundreds of billions of dollars. Offsets could be sparse, as conference rules prevent the two chambers from considering any extraneous provisions not already included in either measure.

One possibility that President Donald Trump appeared to endorse recently is to raise the corporate tax rate above the proposed 20 percent, an option that could bring about a host of other issues and one that members are not eager to pursue.

“I hope we can avoid it,” Senate Majority Whip John Cornyn said Wednesday of that option. “We want to keep this as pro-growth as we possibly can, so raising rates is moving in the wrong direction.”

Bridge over troubled water

GOP aides and outside experts expect the Senate bill to act as the foundation, given that the margins for victory are much smaller in that chamber. The Senate measure has also complied with parliamentary rules governing the budget reconciliation process that Republicans are using to advance it there.

As House members line up to push leadership to maintain key aspects of their chamber’s bill, Senate Majority Leader Mitch McConnell on Wednesday sent a warning shot.

“The conference report’s got to pass both houses, and I would remind our friends in the House, we have a very, very slim margin in the Senate,” the Kentucky Republican told conservative radio host Hugh Hewitt.

The negotiations will occur largely behind closed doors. And while several aides expect the talks to be tough, they still predict it could be wrapped before the end of December — a deadline McConnell and Trump have pushed for.

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Treatment of the corporate alternative minimum tax is among the top issues to work through. The House measure would fully repeal it at a cost of $40 billion over 10 years, according to an estimate from the Joint Committee on Taxation. The Senate, as a last-minute way to raise revenue, opted to keep the corporate AMT at its current 20 percent rate.

One lawmaker speaking on background to discuss ongoing negotiations said current conversations with the House center around repealing the tax. But Senate Republican Conference Chairman John Thune said a partial repeal — such as reducing the current rate — may be pursued due to revenue concerns.

“There are different ways you could structure a repeal — or a partial repeal,” the South Dakota Republican said Wednesday. “If you adjust the rate, take the rate down. And so it’s all scalable.”

Another potential point of contention will be the state and local tax deduction, also known as SALT.

Both the Senate and House bills would largely repeal it, but would still allow for a $10,000 property tax deduction. The House is exploring an added measure that would also allow a deduction of up to $10,000 for state and local income taxes. 

The proposal would help address concerns from members from high-tax states like California, but would come with a hefty price tag.

“I don’t see any easy way to do that at a 10k cap within the limits that they set themselves,” said Jared Walczak, a senior policy analyst with the conservative-leaning Tax Foundation.

House Republicans are also expected to pressure the Senate to fully repeal the estate tax, another added cost in the billions of dollars.

There could be significant debate over the treatment of pass-through businesses as well. But it might come down to an either-or decision as some experts say there is no compromise approach possible between the two bills.

“The pass-through provisions are quite different and to some degree, they would simply need to pick one or the other. There’s not a simple way to blend them,” Walczak said.

The National Federation of Independent Business has supported both approaches, but gave a somewhat more full-throated endorsement of the Senate measure.

Corporate tax rate to the rescue?

One obvious option for Republicans to gain additional revenue is to hike the corporate tax rate above the proposed 20 percent. While doing so would raise roughly $220 billion, it would come with a host of other issues that the GOP would need to address.

Trump, who previously called 20 percent his red line, hinted earlier this month that a higher rate would be acceptable.

“It could be 22 when it all comes out, but it could also be 20. We’ll see what ultimately comes out,” he told reporters.

Raising the corporate tax to 22 percent could create issues with the provisions affecting pass-through businesses, aides say.

Since the Senate bill would allow those entities to deduct up to 23 percent of their income, it could be viewed as more favorable than the treatment of regular corporations. Such a change could also impact growth forecasts and could make selling an eventual tax bill to businesses harder for Republicans.

“I’ve already voted for 20, I’d like to keep it there and I think that’s probably the prevailing thought,” West Virginia GOP Sen. Shelley Moore Capito said.

In a sign that a higher corporate tax rate may not be palatable in the House, GOP members are already circulating a letter to pressure leaders of the tax-writing panels in both chambers to allow the reduced corporate tax rate to go into effect in 2018. The Senate would delay implementation of the 20 percent rate until 2019.

“Delaying an internationally competitive corporate rate could postpone economy-boosting corporate decisions and jeopardize the amount of immediate investment, reductions in capital costs, and GDP growth that a reduced rate is designed to achieve,” the draft letter obtained by Roll Call stated.

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