WASHINGTON—Republicans face a busy legislative calendar and mounting pressure to pass tax reform by the end of this year.
“I think we’re going to get it passed,” President Donald Trump said at the White House during a meeting with congressional leaders on Nov. 28. “It’s going to have lots of adjustments before it ends.”
Republican leaders need to address some of the concerns raised by individual legislators and resolve differences between the two pieces of legislation before the reform can be signed into law by Trump.
“We’re looking forward to finding common ground in conference, finalizing the details, and sending this historic legislation to the president by the end of the year,” said Kevin Brady, chairman of the House Committee on Ways and Means, at the American Enterprise Institute (AEI) on Nov. 28.
The House bill and the Senate bill are not identical but are very much on the same page, according to Alex Brill, a resident fellow at AEI, a conservative think tank.
Most changes will be technical in nature and carried out by the conference committee. According to Brill, reconciliation might take longer than lawmakers have predicted, but he is confident that the differences will ultimately get resolved.
“Republicans are very good at legislating tax policy. They’ve got a lot of experience and expertise in that space,” he said.
Both the House and Senate bills agree on reducing the corporate income tax rate from 35 percent to 20 percent, which is the centerpiece of this tax reform. But the Senate’s tax cut would only take full effect in 2019. Some are concerned that the delay would disappoint businesses, which would put off investment.
According to Brill, however, this delay in the tax cut could indeed boost investments.
Businesses will have larger tax savings from writing off the costs of their investments at high tax rates, stated Brill in a note. And a year later, they will pay lower taxes on the payoffs from their investments.
“While a rate cut is phasing in and businesses expect the tax rate to go down, the timing mismatch boosts investment,” Brill wrote.
Some experts believe the full expensing provision of the new tax bill is more important than tax cuts. Full expensing would allow companies to immediately deduct 100 percent of the cost of capital investments from their tax bill.
“One provision I’m particularly excited about is full expensing,” said Brady, at the AEI.
“For the first time, businesses of all sizes will be able to immediately deduct purchases of equipment that improves operations and enhances the skills of their workers.”
Although corporate tax cuts and the full expensing provision are welcome, critics argue that tax reform favors large corporations over small businesses.
Resolving Pass-through Provisions
Many small businesses in the United States are structured as pass-through entities, meaning that the owners pay taxes on business profit as personal income, and a few Republicans have voiced concern over tax provisions related to these entities.
Opponents say both tax-reform bills have complicated pass-through provisions and do not provide enough tax relief to small businesses.
“It would be fair to say that there is some level of disappointment in both the House and the Senate bill,” said Jane Campbell, president of Women Impacting Public Policy (WIPP), a nonpartisan organization advocating on behalf of women entrepreneurs.
Campbell urged Congress to consider making the pass-through provision equivalent to the corporate rate reduction, “whether the treatment is structured as a lower tax rate, as in the House bill, or a deduction in the Senate version,” she said.
Pass-through entities comprise over 95 percent of all businesses in the United States, according to WIPP.
Sen. Ron Johnson (R-Wis.) was the first Republican to come out against both plans, claiming that the small businesses are not treated fairly.
However, he voted on Nov. 28 with the Republican majority in the Senate budget committee to move the bill forward, after gaining assurance from Republican leaders that those issues would be addressed.
“I am hopeful,” Campbell said. “It’ll be interesting to see how that gets resolved.”
The Senate plan would continue taxing pass-through entities at the individual rate, with a top proposed rate of 38.5 percent. But to provide some relief, it would allow a 17.4 percent business income deduction.
The House bill, by contrast, would cap the pass-through tax rate at 25 percent. It also would set anti-abuse rules that allow only 30 percent of a company’s revenue to be eligible for that rate. The other 70 percent would be treated as wage income subject to the individual tax rate. This would result in a blended tax rate of 35 percent to 38 percent for many small businesses.
Under both proposals, many service providers, such as consulting, law, and financial services companies, cannot benefit from preferential treatment, although the Senate’s restrictions are broader.
“Constructing the small-business pass-through provision in a way that doesn’t open up opportunities for abuse is very difficult,” said Brill.
One way to limit the risk of some of those abuses is those guardrail policies set by tax bills, he said, which include the exclusion of professional services.
“[Whether] that’s good or not is a separate question. I have some concerns about the risk potential for abuse.”