Senate Tax Bill Reveals Key Differences With House

WASHINGTON—Senate Republicans introduced their own tax plan, which has some significant differences compared to the House version approved by the Ways and Means committee. The differences raise uncertainty about Congress’ ability to meet its year-end deadline to overhaul the U.S. tax code.

The Senate is expected to vote for the bill after Thanksgiving. If the House and the Senate pass different versions of the bill, a conference committee will draft a compromise bill that both houses can accept.

Republicans have an ambitious schedule to get a bill to the president’s desk by the end of the year.

“We’ve got to get taxes done this year,” said Gary Cohn, the president’s top economic adviser, at the Wall Street Journal’s CEO Council Meeting on Nov. 14.

“The legislative calendar is going to get very crowded come the first and second week of December.”

Despite the differences in both bills, Cohn is confident that Congress will pass tax reform this year.

Here are the major differences between the Senate and the House plans:

1. The Senate delays corporate tax rate cuts and introduces higher tax relief for pass-through entities.

Both plans agree on reducing the corporate income tax rate from 35 percent to 20 percent, but the Senate’s delays the cut until 2019.

The Senate plan continues taxing pass-through entities at the individual rate, with a top proposed rate of 38.5 percent. But to provide relief for most small companies, it allows a 17.4 percent business income deduction.

The House bill, by contrast, would cap the pass-through tax rate at 25 percent. It also sets anti-abuse rules that allow only 30 percent of a company’s revenue to be eligible for that rate. The other 70 percent is treated as wage income subject to the individual tax rate. This results in a blended tax rate of 35 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, according to the Tax Foundation, an independent Washington policy group.

2. The chambers apply different rates for repatriation.

Both tax plans seek to level the playing field between U.S. and foreign companies. So they both move from a worldwide taxation system—which taxes income earned anywhere in the world—to a territorial system, only taxing income earned inside the home country.

As a transition to the territorial system, there will be one-time tax payable on profits of U.S. multinationals that have already accumulated overseas. The Senate bill proposes a rate of 10 percent for liquid assets and 5 percent for other assets, while the House bill proposes 14 percent and 7 percent, respectively.

Both the House and Senate tax reform bills include significant rules to limit tax avoidance, such as the strategy of base erosion and profit shifting, which is used by companies to artificially shift profits to low- or no-tax countries.

3. The Senate bill maintains seven individual tax brackets.

In an effort to simplify the individual tax rates, the House bill condenses the current seven tax brackets down to four: 12 percent, 25 percent, 35 percent, and 39.6 percent. And it increases income limits for each tax bracket.  

However, the Senate bill maintains the seven tax brackets, while reducing rates and lowering the top marginal rate to 38.5 percent.

In addition, both the Senate and House bills nearly double the standard deduction. However, they have differences in treating other tax credits and deductions.

4. The Senate entirely repeals the deduction for state and local taxes (SALT) and has no exception for property taxes.

The House bill also repeals SALT but allows deductions up to $10,000 for property taxes in an effort to win support from Republicans who are against the proposal.

Those who benefit from the SALT deductions are mostly taxpayers in high-tax states. Democrats and some House Republicans from high-tax states like New York, New Jersey, and California oppose this proposal, as the repeal would cause taxes to rise for their constituents.

5. The Senate bill maintains the current mortgage interest deduction rules.

The Senate would keep the current rules that allow the deduction of interest for newly purchased homes up to $1 million. It eliminates the deduction for equity debt. Meanwhile, the House proposal caps the mortgage interest deduction to the first $500,000 in principal value.

In addition, the Senate would keep a number of popular tax credits and deductions that would be repealed by the House tax bill, including medical expenses, teacher expenses, and student loan interest.

6. The Senate proposal keeps the estate tax and doubles the threshold for the value of inheritance to $11.2 million.

The House bill, in contrast, increases the threshold to $10 million and eliminates it completely in six years’ time.

7. The revised Senate plan will repeal Obamacare’s individual mandate.

Senate Republican leaders decided on Nov. 14 to include the repeal of Obamacare’s individual mandate in the revised version of the bill. The individual mandate provision requires most Americans to have a basic level of health insurance coverage or else pay a tax penalty.

“By eliminating the Obamacare mandate tax, we will pass and enact a real tax relief for working families all across America,” said Vice President Mike Pence at the meeting on Nov. 14.

“We’ll end the era that began seven long years ago, where the federal government has the taxing power to order every American to buy insurance,” he said.

According to experts, emerging differences in the Senate and House plans could complicate congressional passage. Whether Congress will succeed in meeting the ambitious deadline remains to be seen.

“Both the Senate and the House are finding different ways to compensate different issues,” Cohn said. “Ultimately, they get to the same answer.”

Both chambers are seeking to deliver tax relief for middle-income families, he said.