- Senate version of tax reform deviates notably from the House bill released one week ago.
- Among other changes, it delays the reduction of the corporate tax to 20 percent by a year, allows a 17.4 percent deduction for pass-through entities, keeps certain employee tax credits, keeps seven tax brackets for individuals (with new rates and income thresholds), and limits deductions differently.
- The House Ways and Means Committee also passed its version of the tax overhaul.
- The House should bring the bill to the floor this week; the Senate Finance Committee began work on the Senate bill on Nov. 13.
- Further changes are coming to both versions of tax reform legislation as the lawmaking process unfolds.
Senate bill preserves some popular tax breaks, keeps 7 tax brackets, moves away from itemized tax deductions
On Nov. 9, 2017, Senate Republicans revealed their plan for reforming the federal tax code. Their version differs from the House bill, released Nov. 2, in some significant ways. The Senate's proposal:
- Like the House, would reduce the corporate tax rate to 20 percent from 35 percent, although it delays the effective date of this change for a year. President Trump has been insistent the change must be immediate.
- Veers from the House proposal in the treatment of pass-through entities. The Senate plan would generally allow a 17.4 percent deduction for qualified business income for the individual taxpayer. By contrast, the House approached tax relief by limiting the tax rate on business income with complex carve-outs and rules.
- Does not modify or eliminate certain tax credits, such as the Work Opportunity Tax Credit or tip credit.
- Retains several employee fringe-benefit exclusions that the House bill proposed to eliminate, such as the dependent and child care tax credit, and employee achievement awards. The Senate bill also keeps the adoption assistance benefit; the House used the chairman's amendment to add this benefit back to its proposal.
- Retains seven individual tax brackets, unlike the House version, which would decrease the number from seven to four. However, the Senate plan changes rates and income thresholds proposing rates of 10 percent, 12 percent, 22.5 percent, 25 percent, 32.5 percent, 35 percent, and 38.5 percent.
- Moves away from itemized tax deductions to a standard deduction, like the House bill. The Senate proposal nearly doubles the standard deduction. However, the Senate bill limits deductions differently. It retains the mortgage interest deduction at the current rate, as opposed to reducing the cap. The plan would eliminate deductions for state and local income tax, including the property tax deduction — significant for states with high tax rates. The Senate plan would keep the individual deduction for qualified medical expenses.
Senate Republicans made other minor tweaks to amounts and to tax reform's general direction, differences that lawmakers will need to reconcile with the House plan.
House Ways and Means Committee passes Tax Cuts and Jobs Act
On Nov. 9, the House Ways and Means Committee passed its version of the tax overhaul along party lines — 24 Republicans to 16 Democrats. The committee amended the legislation, called the Tax Cuts and Jobs Act (HR 1), from its original proposal as various groups lobbied lawmakers to adjust the original text to represent their interests.
High-level changes to the Ways and Means Committee bill included:
- A new tax rate for pass-through entities, to appease the concern of the National Federation of Independent Business that tax reform wasn't helping enough small companies. A lower rate of 9 percent for business income would be phased in over the next five years, applicable to active owners and shareholders for revenue up to certain limits.
- Amending self-employment tax for pass-through entities, changing it back to current law.
- Returning the taxability of some employer benefits back to current law. The bill reinstitutes the tax treatment of adoption assistance programs and nonqualified deferred compensation plans to current law, allowing exclusion from taxability.
The House is expected to bring the bill to the floor this week; the Senate Finance Committee began marking up the Senate bill on Nov. 13. Expect further changes to both versions of tax reform legislation as the lawmaking process unfolds and interest groups lobby Congress to garner benefits for their constituents. This may mean the insertion of controversial items not currently contained in either chamber's proposal, such as repeal of the Affordable Care Act's individual mandate or changes to retirement benefits.
The Congressional Budget Office (CBO) continues to score the House and Senate's tax proposals' effects on the U.S. deficit. Last week, the CBO estimated that the House's amended version would add $1.7 trillion to the deficit over 10 years. The CBO score is particularly important in the Senate, where the process of budget reconciliation imposes complex and stringent rules. Budget reconciliation calls for close examination of the tax plan's cost in a 10-year budget window, as well as any provision that may run afoul of budget rules. The Senate may need to adjust its proposal to adhere to these guardrails.
Employers may see major changes to taxation
At this juncture of tax reform legislation, nothing has changed, but it's important that employers keep tabs on the possibilities for future tax policy. Substantial changes may occur to the legislative proposals making their way through Congress. Passage of a bill in one legislative chamber means that its version of tax reform must be reconciled with the version passed in the other chamber. The significant policy deviations in the current proposals mean that the House and the Senate face substantial work — and compromise — prior to any final agreement.
Until both the Senate and the House pass the same bill and President Trump signs it, the current tax policy remains.
Employers face tax uncertainty
Employers must deal with the uncertainty of a future federal tax code even as they make decisions on tax filing for the current year. Tax reform legislation, recently introduced in the House, could look drastically different as it makes its long journey through Congress. There is no certainty that it will come to fruition. Nevertheless, employers will have to proceed using the best information available, extrapolating potential impacts to their business.