House And Senate Tax Plans Have Major Differences That Need to Be Reconciled

Senate Majority Leader is confident both chambers can settle differences

Senate Majority Leader Mitch McConnell (R., Ky.) / Getty Images
December 5, 2017

On Saturday, the Senate joined the House in passing its version of tax reform known as the Tax Cuts and Jobs Act. While the two versions are very similar, there are 18 major differences that still need to be discussed between the two chambers in conference committee before the measure moves on, according to an analysis from the Tax Foundation.

Senate Majority Leader Mitch McConnell (R., Ky.) said the Senate had adopted key priorities from the House to get both versions aligned closer together with each other. He was confident the chambers could settle the differences.

"The good news for proponents of the bill is that McConnell is right: The Senate bill moved in the House's direction on several important issues and was already identical on key points," explains the Tax Foundation.

As it currently stands, both versions of the bill reduce the corporate tax rate to 20 percent, keep the state and local tax property tax deduction capped to $10,000, move to chained CPI, and apply some primary and secondary education expenses to 529 college savings accounts.

According to the Tax Foundation, the differences involve some modest changes as well as more difficult policy decisions concerning the alternative minimum tax and the taxation of pass-through business income.

The first major difference between the two versions is in regard to individual tax rates and brackets. The House version reduces the number of brackets from seven to four: a 12 percent, 25 percent, 35 percent, and 39.6 percent bracket. The Senate version keeps the current seven brackets, but reduces the rates to 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 38.5 percent.

House Majority Leader Kevin McCarthy (R., Calif.) said he believed those rates could be worked out, and he would like to see rates go even lower if possible.

Another difference between the bills concerns modest changes in the amount for the standard deduction. The House would gives singles a standard deduction of $12,200, while the Senate would give $12,000. Households and joint filers would get a standard deduction of $18,300 and $24,400 in the House version, respectively, while getting $18,000 and $24,000 in the Senate version.

Under the House plan, the child tax credit would be increased to $1,600 and would phase out for joint filers at $230,000. A new $300 tax credit would be given to families who are not eligible for a child tax credit, and this would expire after five years. The Senate version would increase the child tax credit to $2,000 and after earning $500,000 for joint filers, would phase out. These provisions would stop in year 2025.

The House version repeals the Medical Expense Deduction while the Senate version keeps it through 2018 and would increase the eligibility expenses from 7.5 percent to 10 percent for it to be taken.

The House version reduces the mortage interest deduction to $500,000, and the Senate keeps the deduction for acquisition debt and eliminates it for equity debt.

In regards to graduate student income, the House allows tuition waivers to be considered taxable income, while the Senate does not include this provision at all.

One of the more difficult parts to reconcile, according to the Tax Foundation, is the taxation of pass-throughs. Under the House version, pass-throughs would be taxed at 25 percent and include anti-abuse rules that assume 70 percent of income is wage income and 30 percent is business income. Under the Senate version, a 23 percent deduction would be adopted for qualifying businesses. This provision would expire in 2025.

While the House and Senate agree that the corporate rate should be reduced to 20 percent, the House would implement this in 2018 while the Senate would delay it to 2019.

The House and Senate also agree to full expensing of capital investment, which include things like machinery and equipment for five years. However, in the House version, the Section 179 cap would be increased to $5 million from $500,000, and the phaseout would begin at $20 million. The Senate raises the Section 179 cap to $1 million and the phaseout would begin at $2.5 million.

Another difference: The House repeals the Alternative Minimum Taxes for individuals and corporations while the Senate keeps the Alternative Minimum Tax as is but increases the exemption amount for individuals, roughly 40 percent higher than it is now.

The House version caps the net interest deduction at 30 percent before depreciation, amortization, interest, and taxes. The Senate also caps the deduction at 30 percent but only before interest and taxes.

Both versions eliminate operating loss carrybacks but the House version restricts the deduction to 90 percent of taxable income while the Senate restricts the deduction to 80 percent.

With regard to cash accounting, the House version raises eligibility from $5 million to $25 million while the Senate raises it to $15 million.

The House version also eliminates business credits for energy, rehabilitation, orphan drugs, private activity bonds, and contribution of capital. The Senate only modifies the orphan drug and rehabilitation credit, limits FDIC premium deductions, and keeps some of the preferences eliminated by the House.

Both the House and Senate move to a territorial tax system but the House includes 50 percent of excess returns in U.S. shareholder income and a tax on payments made to overseas firms. The Senate, in contrast, implements a minimum tax of the excess of 10 percent of taxable income.

Both versions enact deemed repatriation but at different rates. Under the House version, liquid assets are taxed at a rate of 14 percent and illiquid assets taxed at 7 percent. In the Senate version, liquid assets are taxed at 14.49 percent and illiquid assets are taxed at 7.49 percent.

While the Senate version doubles the estate tax exemption, the House version increases it to $10 million and repeals it after six years.

Finally, the Senate eliminates the individual mandate penalty or reduces it to zero, while the House keeps it.

According to Wayne Winegarden, a senior fellow at the Pacific Research Institute, the most important reforms in both bills are corporate tax reform.

"U.S. businesses face a distinct disadvantage compared to businesses from other countries, and this disadvantage reduces the economic vibrancy of the U.S. economy," he said. "Both bills address this disadvantage, making the U.S. corporate tax rate globally competitive once again."

"The differences between the Senate and House versions, while less important than these reforms, are substantial enough that complex negotiations lie ahead," he said. "If the best from both bills are combined, the total package can be improved, but the reverse is also possible. The next steps should be to combine the best aspects of both bills."

According to the Tax Foundation, once both chambers decide on differences, they must produce a report that is approved by both.

"Such reports are privileged, meaning that the motion to proceed to consideration of the report is not debatable, and that the report must be considered as-is, without amendments," the foundation explains. "In the case of reconciliation bills, moreover, there is no filibuster, and debate is limited to 10 hours. These rules are all very important to the prospects of a bill that passed the Senate with such a narrow margin. But as that margin shows, there may be scant room to negotiate."

Published under: Tax Reform , Taxes