The Tax Cuts & Jobs Act (TCJA) continues to make its way through Congress. The House recently voted to approve its version of the tax bill while the Senate Finance Committee completed markup on its own version, which now moves to the Senate floor for debate. These actions move the legislation further along the path toward ultimate passage, but key obstacles remain.
Passage in the House
On November 16, the House voted 227-205 to approve its version of the TCJA. This came only one week after the House Ways & Means Committee approved the bill and sent it to the full House for consideration and only two weeks after its initial introduction to the Ways & Means Committee. Thirteen Republicans voted against the bill, as did every Democrat.
The House approved its tax bill, but limitations on the state and local tax deduction caused some Republican defections.
The state and local tax deduction remains a contentious issue. All of the Republicans that voted against the bill are from California, New Jersey, or New York. Many taxpayers in those states would be adversely impacted by eliminating the state and local tax deduction, except for a $10,000 property tax deduction, included in the House bill.
The House passage of the TCJA is a very significant step in the process, but several additional steps remain, which are discussed further below. The content of the TCJA passed by the House is substantially similar to the summary we previously provided, so the remainder of this discussion will focus on the developments in the Senate and the next steps.
Developments in the Senate
The Senate Finance Committee began markup of its version of a tax bill on November 13 and completed its markup on November 16. That bill differs in many key respects from the House bill. Many of the differences between the House and the Senate Finance Committee bills are discussed here. However, several significant amendments were made to the Senate bill before the Senate Finance Committee voted to move it to the Senate floor for debate. Those amendments include:
- Adjusting three of the seven incremental tax rates (22.5 percent reduced to 22 percent; 25 percent reduced to 24 percent; and 32.5 percent reduced to 32 percent) and slightly expanding several tax brackets.
- Increasing the child tax credit to $2,000 from $1,650 in the original bill but decreasing the phase-out to $500,000 of income for married taxpayers from $1,000,000. This provision may mitigate eliminating the personal exemption for many taxpayers.
- Eliminating the individual mandate penalty for taxpayers who do not maintain a minimum level of health insurance beginning in 2019. According to the Congressional Budget Office, this provision is projected to result in fewer people obtaining health insurance, but would reduce federal spending to offset tax decreases in other parts of the bill.
- Providing an expiration date of Dec. 31, 2025 for almost all of the individual tax provisions in the bill. This provision was necessary in order to meet Senate budgetary rules that prevent the legislation from decreasing revenues beyond the current budget window. Republicans have indicated that they do not anticipate this expiration to actually occur and that a future Congress will ultimately extend these provisions.
- Removing a provision from the original bill that would have resulted in certain forms of nonqualified deferred compensation being taxable much sooner than under current law. This provision was also removed from the House bill meaning it’s unlikely that any substantial changes to the deferred compensation rules will be included in any final legislation.
- Taxing the gain on transfer of partnership interests received for services as ordinary income if they are held less than three years. This provision is primarily targeted toward carried interests received by private equity and other similar investment funds. It’s very similar to the House version of this provision.
The Senate Finance Committee made amendments to its bill, including eliminating the health insurance individual mandate penalty and addressing the taxation of carried interests.
- Providing that the 17.4 percent deduction for pass-through income would be applicable to service businesses for income up to $250,000 for single taxpayers and $500,000 for married taxpayers. The benefit of this deduction is fully phased out over the next $50,000 of pass-through income for single taxpayers and $100,000 for married taxpayers. Previously, service businesses were excluded from this provision altogether.
- Clarifying that the 17.4 percent pass-through income deduction is limited to 50 percent of the taxpayer’s allocable share of W-2 wages of the pass-through business in the case of partnerships and S corporations. It also provided that this limitation would not apply for income up to $250,000 for single taxpayers and $500,000 for married taxpayers.
- Making a number of modifications to the treatment of net operating loss carryforwards, research and development expenses, and other provisions that would not occur for several years.
- Providing a number of temporary tax incentives for smaller producers in the beer, wine, and spirits industries. Specifically, these include exemption from certain inventory capitalization rules, reduction in excise taxes, and changes to rules regarding transfers of product.
- Restoring the historic rehabilitation credit to 20 percent of expenditures rather than the reduction to 10 percent that was included in the original bill, but requires the credit to be claimed over five years.
- Creating a zero percent deduction for dividends paid by corporations. Under current law, dividends paid by corporations aren’t deductible. While a zero percent deduction does not change the effect of current law, the insertion of this provision may provide a vehicle for that percentage to be increased to an amount greater than zero percent during Senate floor debates. This would be consistent with the stated goals of Republican leaders in the Senate to reduce the impact of the double layer of tax on corporations and their shareholders.
With the Senate Finance Committee approving its tax bill, it will now move to the Senate floor for debate, which is expected to begin shortly after the Thanksgiving recess. The slim Republican majority in the Senate provides little assurance that a tax bill will be passed. Many bills get to this stage in the legislative process with a great deal of optimism but ultimately aren’t enacted into law. Still, there does appear to be positive momentum for tax reform.
Significant differences between the House and Senate bills remain. Those changes may even grow because the Senate will permit amendments to be introduced on the Senate floor. If the Senate passes a bill, it’s possible that the House could accept a bill passed by the Senate in its entirety. However, it’s much more likely that a conference committee will be presented with the difficult task of reconciling the differences between bills passed by the House and Senate in a manner that enough Republicans in both chambers will find acceptable