WASHINGTON (BLOOMBERG) - Expiring tax cuts, business perks and healthcare politics loom over House and Senate Republicans as they face the daunting task of hammering out the differences between their competing Bills to rewrite the US tax code.
Different versions of the Bill passed the Senate and House with only Republicans' votes, and the GOP can't afford to lose too many supporters in the negotiations as they seek a compromise. The party can spare only 22 votes in the House and two in the Senate.
There's a lot they agree on. For example, they both would cut the corporate tax rate to 20 per cent from 35 per cent - though the Senate version would make that change in 2019, a year later than the House Bill would.
But there are some major differences that won't be easy to resolve, and any changes could increase the Bill's cost or force painful trade-offs.
Here are the biggest sticking points - and how they may be resolved.
TEMPORARY TAX CUTS
- House: A US$300 (S$403.74) per person family credit sunsets after 2022
- Senate: All individual tax breaks - including rate cuts and the doubling of the standard deduction - expire after 2025. A planned repeal of state and local deductions for income and sales taxes would also end then, and personal exemptions automatically return after 2025.
- Why it matters: The sunsets in the Senate version largely exist to comply with the chamber's strict rules that forbid legislation from adding to the long-term deficit under the fast-track voting procedure Senate leaders used.
The politics of permanent corporate tax cuts combined with temporary individual tax cuts could be tricky.
- How to resolve it: The Byrd Rule leaves no easy way around a host of sunsets to prevent long-term deficits. In the first decade, a limit of US$1.5 trillion in new deficits has also forced sunsets.
The most they can do is monkey around with the expiration dates and perhaps sunset some provisions rather than others. Many Republicans have taken to arguing future congresses won't let the tax breaks expire.
PASS-THROUGH TAX BREAKS
- House: Pass-through business income is taxed at 25 per cent, with some limits. A lower rate of 9 per cent is also available for some lesser-earning businesses.
- Senate: Pass-through income gets a 23 per cent deduction, subject to limitations, including the same expiration date - end of 2025 - as the individual tax provisions.
- Why it matters: Pass-through businesses, including partnerships, limited liability companies and S corporations, don't pay taxes themselves but pass their earnings to their owners, who then pay at their individual tax rate.
Many House Republicans have insisted the pass-through rate mustn't be higher than 25 per cent. The initial Senate approach would have pushed it north of 30 per cent for many of the highest-earning pass throughs.
The Senate Bill has since been amended to provide a more generous break, but it remains to be seen which will carry the day.
- How to resolve it: Like much else in the Bill, this is a math problem. A deeper break for pass-throughs means raising revenue elsewhere to keep it within the parameters.
The price tag of the overall legislation must stay within the US$1.5 trillion allowance for the first decade and red ink must be wiped out in each year after that.
ALTERNATIVE MINIMUM TAX
- House: Repeals it entirely for both individuals and corporations.
- Senate: Maintains it, but raises the individual exemptions until 2026. Corporate AMT would remain in full.
- Why it matters: The AMT was established as a way to make sure taxpayers didn't leverage enough tax breaks to avoid any meaningful tax payment.
Wiping it out is a high priority for conservatives, and the Senate's last-minute decision to partially preserve it - albeit in amended form for individuals - may not sit well with many House Republicans.
Maintaining an AMT in the Senate bill was crucial to paying for changes aimed at winning holdouts, such as the enhanced higher pass-through break and a state and local tax deduction for property taxes.
- How to resolve it: Partially restore the AMT in the House Bill, or find money elsewhere.
OBAMACARE INDIVIDUAL MANDATE
- House: No action on the mandate.
- Senate: Effectively repeals the mandate by zeroing out the tax penalty for individuals who don't purchase health insurance.
- Why it matters: This is seen as a win-win for most Republicans - smashing the Affordable Care Act, as they've promised to do for years, while raising some US$300 billion to pay for tax cuts.
The Congressional Budget Office has said the savings would result because the federal government would no longer have to provide subsidies for roughly 13 million people who would no longer be insured.
- How to resolve it: House Republicans mostly support repealing the mandate - suggesting that this won't be a sticking point.
It could get tricky, however, if the votes of moderates are needed. House Speaker Paul Ryan on Thursday (Nov 30) declined to comment on whether such measures would be adopted.
- House: Full and immediate expensing on equipment purchases that expires in five years.
- Senate: A "step-down" approach that phases out the expensing benefit after five years rather than an immediate cliff.
- Why it matters: Senator Jeff Flake secured the phase-out change as crucial to his decision to support the Bill, calling the House version a huge "gimmick" in that Congress wouldn't allow a hard cliff.
"We were able to take that and ratchet it down after five years in a way that we can hold," he said.
- How to resolve it: Either pass the Bill without Mr Flake's vote, or persuade House Republicans to go along with a phase-out.
MORTGAGE INTEREST DEDUCTION
- House: Cuts the deduction cap for new purchases of homes in half - to loans of US$500,000.
- Senate: No change to the current US$1 million limit.
- Why it matters: This is a cherished tax break in the code that affects many upper-middle-income and wealthy families.
Senate Republicans don't want to limit it. If they refuse to give in, then House Republicans will need to swallow other revenue offsets to cover the cost of leaving the deduction as is.
- How to resolve it: Find revenue elsewhere.
INDIVIDUAL STATE AND LOCAL TAX DEDUCTIONS
- House: Repealed, with a property tax exemption up to US$10,000.
- Senate: Same.
- Why it matters: A last-minute add-on to the Senate Bill - which initially sought to kill SALT entirely - mirrors the House exemption.
That's key to winning over Senator Susan Collins of Maine and holding on to a few-dozen House Republicans in high-tax states like New York and New Jersey that rely on the deduction.
- How to resolve it: Don't mess with the exemption, or crucial votes could disappear.
It's an expensive tax break and last-minute searches for revenue in conference committee could tempt negotiators to look at it.
- House: Limits the number of multi-million dollar estates that would pay the tax by doubling the threshold at which it applies, then fully repeals the levy in 2025.
- Senate: Doubles the exemption amount until 2026, then reverts to lower thresholds.
- Why it matters: Eliminating the current 40 per cent levy applied to estates worth more than US$5.49 million for individuals has been a long-sought Republican goal.
Conservatives detest the estate tax, and have said it hurts small businesses and farmers. Data from 2013 shows that just 3 per cent of estates subject to the tax were businesses and farms, according to the Tax Policy Centre, a Washington research group.
- How to resolve it: Persuade House Republicans to accept that the tax isn't going away, or be forced to find revenue elsewhere - the levy brought in US$18 billion last year. Repealing it also won't sit well with Ms Collins.