Policy

GOP Tax Bill: The Fine-Tuning and Defense Begins

House Republicans hope to vote on measure by Thanksgiving

From left, House Republican Conference Chairwoman Cathy McMorris Rodgers, Florida Rep. Carlos Curbelo, Kansas Rep. Lynn Jenkins, Ways and Means Chairman Kevin Brady, Speaker Paul D. Ryan, Florida Rep. Vern Buchanan and South Dakota Rep. Kristi Noem at a news conference in the Longworth Building on Thursday to unveil the House GOP tax bill. (Tom Williams/CQ Roll Call)

The House Republican tax bill will undergo lots of tweaking, but the generally positive response so far indicates that leadership’s plan to vote on the overhaul by Thanksgiving is still within reach.

The stakes are high for Republicans as they search for a major legislative achievement ahead of the 2018 elections. Members agree a win is needed under President Donald Trump’s leadership after the effort to repeal and replace the 2010 health care law collapsed in the Senate.

Rank-and-file lawmakers on Thursday echoed Speaker Paul D. Ryan’s message that the bill would provide relief to the middle class, increase take-home pay, and spur job creation and economic growth. But some also expressed concerns about newly released details on limits to individual deductions, the limited reach of small business tax relief and complex international provisions.

While lobbyists and interest groups are already out in force, many lawmakers appear ready to join House Ways and Means Chairman Kevin Brady in his effort to defend provisions that tax writers have ended or curbed.

In a nod to their history-making potential, the Texas Republican provided a rallying call Thursday for members and their constituents to stand strong against the fight ahead.

“This is it, America. This is our opportunity to make tax reform a reality and deliver the most transformational tax cuts in a generation,” Brady said, as he trained the GOP’s attention on special interests, TV pundits and other “pessimists.”

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Democrats universally panned the tax bill as a tax cut for the wealthy. Even centrist Democrats criticized the measure, in large part because it adds $1.5 trillion to the deficit over 10 years.

“Republicans have raided the very deductions and credits that help millions of families afford everything from groceries to medical expenses to a college education, just to give more [to] those who don’t need it and haven’t asked for it,” Ways and Means ranking member Richard E. Neal of Massachusetts said in a statement.

The first wave of tweaks will come in the form of a chairman’s mark before the Ways and Means panel meets Monday at noon for a markup that is expected to go on for days. Amendments could be adopted there, and additional changes could also be incorporated in the Rules Committee through a substitute amendment. Members are not expecting floor amendments.

SALT and mortgage interest

Concerns about a proposal to eliminate the deduction for state and local income taxes and to limit the property tax deduction to $10,000 solidified into opposition for at least three members from high-tax states.

Despite weeks of negotiations over the so-called SALT deduction, the final product fell flat with many Republicans. Unless there are changes to this provision, Reps. Lee Zeldin of New York, and Leonard Lance and Frank A. LoBiondo, both of New Jersey, said they are opposed to the bill.

Others are seeking further changes. For instance, Rep. Tom MacArthur of New Jersey said he’d like to see the property deduction cap raised to $12,500.

Brady suggested some openness to raising the cap but closed the door to restoring the deduction for state and local income or sales taxes.

“It will not return,” he said.

One complication for lawmakers concerned about the SALT deduction was the surprise decision by tax writers to limit the mortgage interest deduction. While the bill would not change the deductibility of interest on existing mortgages, it would cap the deduction on interest for future homeowners at $500,000 of their mortgage loans.

MacArthur said he did not appreciate tax writers springing that on members.

“I’m still working on that and what we do about it, but there’s a lot of good in the bill,” he said. “I think we’ve got to try to improve these couple of areas so we don’t discourage homeownership in certain states.”

The bill would also eliminate the mortgage interest deduction for second homes, which is a concern for Freedom Caucus Chairman Mark Meadows. His North Carolina district includes Asheville and a sprawling mountainous region that are popular vacation spots.

“It’s a substantial deal because we’re a second-home market,” he said.

Small businesses

Under current law, small businesses organized as sole proprietorships, partnerships, limited liability companies, and S corporations, known as pass-through entities, are taxed at the individual owner or shareholder level. That means some of these business owners are currently taxed at the top individual rate of 39.6 percent.

The GOP bill would set the tax rate on business income for these owners and shareholders at 25 percent, with limitations that tax writers have described as “guardrails” to prevent abuse of the reduced rate.

The so-called guardrail provision seems to favor those with lots of capital, some members said.

Owners and shareholders have two options. One is to have 30 percent of income taxed at the pass-through rate while the remaining 70 percent would be subject to individual income tax rates. Or they could apply a formula based on their level of capital investments that could result in a higher percentage of income being taxed at the 25 percent rate. The catch for those choosing the formula is that they are bound to it for five years.

“It’s a de facto advantage for those that are in manufacturing, and anybody who is in the software business or in the accounting business or a law firm or anything else would practically be excluded from this,” Meadows said.

Freedom Caucus member Dave Brat also cited concerns about the effect on service-oriented businesses, like hair salons. “That’s kind of the premise of middle-class tax cuts,” the Virginia Republican said.

While conservatives seem to want to loosen the guardrails, Rep. Charlie Dent of Pennsylvania wonders if they’re tight enough. “We want to make sure that random individuals don’t suddenly become pass-through entities,” he said.

International taxation

There was so much confusion about so-called base erosion provisions in the bill, which are designed to ensure U.S. multinational companies don’t exploit the international tax system, that House tax writers could not explain them. That suggests that some of these provisions may be too complicated to be durable, with a House floor vote on the bill expected in two weeks.

The GOP measure would move the U.S. toward a territorial system of taxation in which multinationals are not double-taxed on profits earned overseas that they bring back to the United States. Provisions to prevent base erosion are needed to discourage these companies from shifting domestic profits to a foreign subsidiary, among other avoidance maneuvers.

As the bill’s details are analyzed even more, Ways and Means members know they will have to do more educating on the international tax components and other proposals in the bill.

Congress has rarely taken up tax bills in recent years as members dismissed narrowly focused tax issues as things that could wait for the long-promised overhaul. As a result, lawmakers haven’t had much experience dealing with such complex tax legislation. That’s partly why Democrats are calling attention to the rush to move it through the House before Thanksgiving.

“I have been around Congress long enough to know that bad process usually leads to terrible policy,” Neal said. “This Republican tax bill is no different.”

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