Tax reform bill passes Senate. One last hurdle remains

December 2, 2017 - Posted by: admin - In category:

taxes - No Responses

Early Saturday morning, the Senate Republicans pushed through their version of the tax reform bill by the closest of margins–i.e., a 51-49 vote.  Job done? Nope.  Now the Republican leaders from the House of Representatives and the Senate must get together to reconcile the differences between the bills each chamber of the legislature passed.

Below are some of the key differences between the Senate and House tax reform bills that must be resolved in the coming days to meet the self-imposed, but loudly-promised, deadline of enactment and POTUS signature by the end of 2017.  

Obamacare mandate

The House bill would retain the Obamacare individual mandate, while the Senate version calls for a repeal of the same.  House Speaker Paul Ryan has indicated his willingness to move the way of the Senate on this point.  Knowing how hard the Republicans have been trying to attack and repeal Obamacare for years, it seems like a good bet that the Senate will prevail on this point and the Obamacare mandate will soon be a thing of the past.

Tax cuts for individuals

Both the Senate and House bills contemplate reduced taxes for individuals (and for companies).  The difference is that the House version would make these tax cuts “permanent” while the Senate tax cuts would expire in 2025 (due largely to Senate rules which require legislation to be budget-neutral after ten years).  Two things to note here.  First, “permanent” is in quotes because while it sounds nice and garners a lot of political capital (pun intended), using words like permanent, forever, irrevocable, etc. in legislation is ineffectual.  There is nothing that prevents Congress from coming along the very next day, week or year and amending or removing such legislation.  Second, on the Senate sunset after ten years, Republicans are confident that this would be extended later and thereby enable them to kick the can down the road in future ten-year increments.

Estate tax repeal

The Senate would double the estate tax exemption from its current $5.5 million per person to permit an individual to shield $11 million of assets from estate tax exposure.  We can assume that portability would remain and this would then enable a married couple to pass up to $22 million free of estate tax (and likely GST and gift tax).  The House would also double the exclusion amount to $11 million per person until the year 2024, when estate tax would go away altogether.  The bottom line on this point is that the estate tax currently affects only about 2 out of 1,000 Americans (at current exclusion levels) and doubling the exclusion amount would even further decrease the application of federal estate tax.  Therefore, whether estate tax goes away altogether or the lifetime exclusion amount is merely doubled, and some form of estate tax remains in the federal tax code, this is not going to be a meaningful difference for 99% of Americans or the federal treasury.

Increased Child Tax Credit

The Senate bill doubles the child tax credit from $1,000 to $2,000, with a few exceptions relating to families that don’t make enough income to pay income taxes.  The House is looking to increase the child tax credit to $1,600, but with a similar restriction for families which don’t make enough to pay income taxes (i.e., those families are not eligible to receive the child tax credit).

Mortgage Interest Deduction

The House seeks to limit the mortgage interest income tax deduction to only $500,000 in home loans, while the Senate would keep the home mortgage interest deduction mostly per the status quo.  This may be a point of significant discussion and negotiation, as it has been the subject of much press and heated debate in the past few weeks.

Tax Bracket

The Senate did not seem all that excited about Trump’s idea of collapsing seven brackets into four and such lack of agreement on this change is reflected in the Senate bill, as tax brackets remain as currently constituted.  On the other hand, the House would change the current seven-bracket regime into one with only four tax brackets, but retain the highest tax rate of 39.6%.  Even so, the House would increase the income level for which this highest bracket would be applicable.

Effectiveness of Corporate Tax Cuts

The House would cut the corporate tax rates to 20% as of January 1, 2018, while the Senate would wait until 2019 for the 20% corporate tax rate to take effect.  This should be one of the easier issues to resolve–just flip a coin on this point, right?  (somewhat joking).  In all seriousness, I would think that both houses would be willing to give on this point for the sake of getting things done. In the long term, it makes little difference whether this corporate tax cut starts in 2018 or 2019, assuming it is going to be a long-term change and not something that is repealed or amended in the near future.

All in all, none of these or any of the other differences between the House and Senate legislation seem to be irreconcilable.  Rather, there appears to be a fairly clear path to find common ground, especially considering that there will be fellow Republicans negotiating with each other.  By that, I am not trying to make any commentary on either political party.  Rather, just making the obvious point that now that it is mostly a group of Republican legislators and staff members, along with a Republican President, who will iron out the last remaining details of this tax form legislation, they should be able to find common ground in fairly short order.

There is no shortage of articles online today about these items, but this post is based largely on an article in the Washington Post, written by Jeff Stein, Kim Soffen, Reuben Fischer-Baum and Kevin Uhrmacher.

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