A race against time in Congress
With few days left in the legislative calendar this year, both the House and Senate are moving to get their bills passed and into Conference Committee to allow enough time to work out a compromise bill before the end of the year – a goal that may be endangered by their cost, and the significant differences between them.
The Senate began its markup process on November 13, with an updated chairman’s mark expected November 14. While the Senate markup may take until the Thanksgiving recess, the House is expected to vote on its bill by the end of the week.
“I was surprised by how different the two bills were, considering they were working off of the same framework,” said Dustin Stamper, director at Grant Thornton’s Washington National Tax Office. “There are major differences in key areas.”
“The way they approach pass-through income is totally different,” he noted. “The House bill generally gives a pass-through a 25 percent rate, but puts limits on how broadly it applies. The Senate provides a deduction against pass-through income. It is allowed against a broader range of pass-through income, but it provides a much shallower effective rate.”
Part of the differences can be attributed to the politics of getting the bill through the Senate, Stamper indicated. “There are a lot of different policy approaches, especially in the international area,” he said. “If you’re looking for politics, you can see that the Senate is not as worried about the state and local tax deduction in the House, which has a lot more members from high-tax states.”
“The big story so far is that neither bill is compliant with reconciliation,” he warned. “Both appear for now to be under the $1.5 million budgetary threshold, but that’s the easiest issue. The harder part is making sure that the bill doesn’t lose any money outside of the 10-year budget window. Both of these bills cost a significant amount of revenue, and would lose money beyond 10 years. They haven’t made any attempt to address it yet. We assume that big beneficial pieces will be forced to expire, but it’s hard to assess the bill without knowing which pieces are permanent and which are not.”
Stamper noted the special election scheduled for December 12 for the vacant Senate seat from Alabama. “The Republican margin is narrow enough as it is,” he said. “Any additional votes they lose makes it that much harder. It will be challenging to craft a final compromise to appease conservatives in the House and moderates in the Senate. But it can be done – the obstacles are not insurmountable.”
Although both bills cut the corporate tax rate to 20 percent, only the Senate bill would include professionals and consultants. “Under the House bill they would be taxed at 25 percent. Both bills try to achieve a carve-out from the highest rates for business income, but they do it in a different manner,” Stamper said.
Whatever reform passes will likely benefit lower- to middle- income and high income individuals, according to David De Jong, CPA, Esq., a principal at Rockville, Md.-based Stein Sperling Bennett De Jong Driscoll PC. “But those making in the upper $100,000 range, to those in the upper $700,000 range, in states with high income and property taxes, will likely be losers with this legislation.”
The chances of tax reform passing this year are slightly better than 50-50, according to Linda O’Brien, legal analyst and editorial lead for tax and emerging practice areas for Wolters Kluwer Legal & Regulatory.
“This week will give us a better picture,” she said. “With the House expected to pass its bill this week, all eyes are on the Senate. The biggest hurdle moving forward is dealing with the deficit. There are fiscal hawks in the Senate who would be opposed to anything that added to the deficit, so this is where you’ll see the focus -- whether they will attempt to pay for tax cuts, or will be willing to live with the deficit because it would add to economic growth.”
“The other challenge they face is time – it’s not on their side,” she said. “There are very few days left on the legislative calendar, which is why they’re attempting to move forward so quickly.”
“If tax reform actually passes and is signed, practitioners should encourage clients to accelerate deductions,” she said. “Businesses would want to defer income until 2018 in anticipation of the lower corporate rate. And if it doesn’t pass this year, taxpayers should balance taxable income and watch for reform later in 2018.”