Over the weekend, in the dead of night, the United States Senate passed their version of Trump’s tax bill, approving a tax plan that would provide a massive tax cut to corporations and the very wealth but provide middle class families with little tax relief.
But before the president’s “big, beautiful Christmas present” can be sent to Trump for his signature, the House and Senate have to reconcile their differences in a conference committee, where Congressional Republicans will hash out a final plan that will have to be passed again by the House and Senate.
Republicans were having some difficulty even getting the tax bill to conference committee Monday. Some of the more conservative members in the House Freedom Caucus threatened to derail a crucial procedural vote in an attempt to win more influence over the GOP’s spending strategy, just days before the deadline to fund the government. While the Freedom Caucus Members eventually wound up voting in favor of moving the bill to conference committee, it was a reminder that there could be many bumps on the road to passage, which is not a guarantee.
Here is what the House and Senate have to work out before they can give corporations and billionaires a tax break.
State and local tax deduction
Perhaps the most contentious issue in the tax reform battle is a deduction that allows individuals to deduct their state and local taxes from their federal tax return. This deduction is popular among high-tax, blue states like New York, New Jersey, and California.
The Senate plan, with no Republicans representing these blue states repeals the deduction entirely, while the House of Representatives, with 53 members from blue states, partially retains it, limiting the deduction to just property taxes and capping it at $10,000. Sen. Susan Collins (R-ME) was promised a $10,000 property tax deduction similar to the House’s to win her crucial vote.
House Ways and Means Committee Chairman Kevin Brady (R-TX) has stated in the past the House would reject a flat-out repeal of the state and local tax deduction.
Temporary tax cuts for individuals
In the House tax bill, all changes to the individual tax code will be permanent, while in the Senate bill changes individual tax cuts would expire after 2025. Tax cuts for corporations, however, will be permanent. The Senate was forced to make individual tax cuts temporary in order for the legislation to stay under $1.5 billion dollars — the amount allotted by the House Budget Committee to increase the federal deficit, which allowed the Senate to pass the bill by 51 votes instead of 60 with no filibuster allowed.
Republicans argue that the temporary tax cuts are nothing to worry about because they likely will be extended by a future Congress.
“One of two things will happen: Either they are not extended, and taxes rise on the middle class. Or they are, and they blow the deficit completely up,” Sen. Michael F. Bennet (D-Colo.) told the Washington Post last week. “There’s a complete logical inconsistency in this plan.”
Child tax credit
The House bill increases the child tax credit to $1,600, while the Senate increases it to $2,000.
Neither bill allows lower income families that pay taxes on their payroll, not income, to receive the extended credit.
Sens. Marco Rubio (R-FL) and Mike Lee (R-UT) spearheaded an amendment that would have extended the credit to millions of low-income families and even offered a way to pay for it by increasing the corporate tax rate two percentage points, from 20 to 22 percent. This amendment failed, with Republicans deciding that meeting the president’s demands of a 20 percent corporate tax rate is more important than actual middle-class tax relief.
Pass-through businesses
The Senate and House tax bills have a drastically different approach on how to treat “pass-through” businesses, which under the current tax code pay taxes on business income by the owner’s individual income rate.
The House bill gives these businesses a 25 percent tax rate, which Trump claims to be a “small business tax cut.” True small business owners, however, already pay a rate of about 12 percent because profits are taxed at their personal income rates. This small business tax cut really only benefits wealthy individuals whose profits are currently being taxed at 35 percent, individuals like hedge fund owners and law partners. This leaves a loophole for the very wealthy to re-characterize portions of their income as profit to receive a huge tax cut.
The House added a complicated rule to its bill in an attempt to address this. For those “actively” involved in the business, only 30 percent of their earnings would be taxed at the 25 percent pass-through rate. The remaining 70 percent would be taxed at the regular individual rate.
This 70-30 rule, however, doesn’t fully close the loophole.
Wealthy “passive” owners — those who don’t directly work for the company they own and more often than not are owners in name only, fronting the cash for their ownership but not overseeing day-to-day operations — would still qualify for the special 25 percent pass-through rate on 100 percent of their earnings.
Trump himself, in addition to many of his Cabinet members, are the owners of passive pass-through businesses. The Trump Organization oversees at least 500 of them.
The Trump Organization is comprised of 500+ passthrough entities. The Kushner Companies are also structured as LLCs. 5/ pic.twitter.com/yrVIsgGB7S
— Seth Hanlon (@SethHanlon) November 5, 2017
Special deductions
The GOP tax bill in the House eliminates nearly all of the deductions in the current tax code, arguing a doubled standard deduction will make up for it. An analysis of the plan, however, has shown this is not the case.
As a result, popular deductions embraced by middle-class families and individuals are on the line.
The medical expense deduction is typically used by those with chronic illnesses, and allows individuals to deduct costly medical expenses that cost more than 10 percent of their adjusted gross income. The deduction helps Americans pay for surgeries and ongoing treatments among a variety of other costly medical procedures.
The House bill eliminates this deduction while the Senate keeps (and expands) it.
Similarly, the House bill eliminates the student loan interest deduction and treats tuition waivers as taxable income, effectively taxing graduate students on income they don’t see a penny of. Also eliminated is a popular tax deduction in the teaching community that allows teachers to deduct expenses for things like school supplies for their students. The Senate leaves these provisions in place.
Repealing the individual mandate
In an effort to free up $338 billion dollars, the Senate tax bill repeals a key portion of the Affordable Care Act. The individual mandate is a provision of Obamacare that requires individuals be covered by health insurance or face a tax. According to the Congressional Budget Office (CBO) repealing the individual mandate would result in 13 million more uninsured Americans, which would result in thousands of deaths. The House bill did not include this provision.
House Speaker Paul Ryan (R-WI) has hinted he is open to including a repeal of the individual mandate in the final bill, as the House has voted in favor of repealing it in the past.