With the House passing its “Tax Cuts and Jobs Act” last week and the Senate releasing its version yesterday (see our Tax Reform page), U.S. tax reform is well underway. But there’s no guarantee efforts on either side will come to full fruition. Indeed, the next few days and weeks will be filled with many legislative obstacles. Specifically, with narrow Republican majorities and a limited time with which to act, the two branches of Congress must come together to resolve the differences between their respective tax reform plans.
Congress would like to set a self-imposed deadline of the end of 2017 to adopt tax reform legislation, a tough task with both chambers out this week for the Thanksgiving holiday. With next week’s return, it leaves a mere 15 legislative days in the calendar year to approve an overall tax bill. Expect the Senate to attempt to approve its version by November 30.
In the meantime, many differences must be resolved between the two tax reform plans. Most notably, the Senate wants to eliminate the “individual mandate” imposed by the 2010 Affordable Care Act, while the House bill doesn’t contain such a provision. Further, the chambers disagree on the type of taxation to be applied to “pass-through” entities. The House wants to tax pass-through business income at a 25% preferential rate, while the Senate prefers a 17.4% deduction for domestic qualified business income derived from pass-through entities.
Other differences between the plans exist as well. The House, for example, wishes to reduce the corporate income rate to 20%, effective in 2018, whereas the Senate would delay this to 2019. Similarly, while both chambers provide for individual tax breaks, the Senate plan would disallow such breaks after 2026. In addition, there is disagreement about the deduction for state and local taxes. The Senate wants to eliminate the deduction in full while the House would preserve the deduction for property taxes up to $10,000.
At a broader level, there’s disagreement as to how tax reform would affect the overall fiscal well-being of the country. Some senators believe the projected $1.4 trillion tax cut created by the legislation over the next 10 years would not be offset by economic growth, and add to the deficit.
Whether – and how – these differences can be resolved is to be determined. Whatever the outcome, Schneider Downs will continue to monitor and keep you informed regarding tax reform. For more information, contact us.