WASHINGTON – Now that the House and the Senate have both released their tax bills, the difficult part can begin: reconciling them.
For months, Republican leaders held weekly meetings so that the tax plans they unveiled would be largely unified, making it possible for legislation to sail through Congress before the end of the year. But the House and Senate proposals diverge on important provisions that will be challenging for lawmakers to rectify, in part because of competing political priorities.
Income tax brackets
Republicans originally wanted to collapse the tax brackets to three, from seven, in part to achieve their goal of simplifying the tax code so that people could file on a postcard. That proved difficult. The House plan went with four brackets: 12 percent, 25 percent, 35 percent and a top rate that stays at 39.6 percent for millionaires.
The Senate bill sticks with seven brackets of 10 percent, 12 percent, 22.5 percent, 25 percent, 32.5 percent and 35 percent but lowers the top rate to 38.5 for high-income individuals and couples.
State and local deductions
Perhaps the thorniest issue is how to handle the state and local tax deduction, which allows people to deduct their state and local income, sales and property taxes. The House bill limits the deduction to just property taxes and caps it at $10,000.
The Senate plan eliminates the deduction entirely, a move that could cause backlash from many upper-middle-class families and spook House members who have already objected to the more generous scaled-back version in their chamber.
Mortgage interest break
Republicans in the House would cap the deduction for mortgage interest debt at $500,000, down from the current cap of $1 million.
Senate Republicans have decided to leave the deduction alone. If that holds, it would be a victory for real estate lobbyists, who have been vocal in opposition to changing the deduction.
Small business treatment
Republicans are united in their desire to give small businesses a tax break, but their plans differ in how to provide a tax cut. House lawmakers created a new 25 percent tax for “pass-through” businesses — sole proprietorships, partnerships and S corporations that currently pay taxes at the individual rate of their owners. However, they erected guardrails to prevent the new rate from becoming a loophole that wealthy individuals can exploit by converting themselves into entities and flowing their income through at the rate of 25 percent.
The Senate takes a different approach, creating a new deduction for pass-through businesses with other incentives to promote investment.
A main priority of the Republican tax effort has been making the United States’ tax system more competitive so that companies invest here and do not have an incentive to shift profits to lower-tax jurisdictions. The Senate plan will impose taxes on U.S. and foreign companies that shift offshore money earned in the U.S. There would be an effective minimum tax on money earned domestically and a 12.5 percent tax on foreign revenue from intellectual property.
The original House approach would have levied a 20 percent “excise tax” on payments between U.S. and foreign companies that are affiliated with each other. This idea set off confusion and opposition from drug and insurance lobbyists and was tweaked by the Ways and Means Committee.
Adoption, education, health
To cut business and individual tax rates and double the standard deduction for individuals and families, Republicans had to do away with many popular tax credits and other prized deductions. The House initially eliminated a tax credit for adoptions but later restored it. It also repeals deductions for medical expenses and counts tuition waivers that are widely used by graduate students as taxable income.
Senate Republicans also preserve the adoption credit. Unlike the House, they keep the deduction for medical expenses and provide relief for graduate students.
Cutting the corporate rate
Reducing the corporate tax rate to 20 percent, from 35 percent, is at the center of both the House and the Senate tax plans. How soon they get there is the only difference. The House bill immediately cuts the corporate tax rate, fulfilling the wishes of President Donald Trump.
The Senate imposes a one-year delay on lowering the rate, a move that allows Senate Republicans to preserve other deductions that the House eliminates.
Repeal the estate tax, or not
Almost all Republicans agree that the estate tax — or death tax as they call it — is unfair. House Republicans decided to double the amount of inherited wealth that is exempt from the tax to $11 million, from $5.5 million, and phase out the tax after six years. In the Senate, the exemption is also doubled, but the death tax never dies.