Comparing the House and Senate versions of the Tax Cuts

The Joint Committee on Taxation released a report Thursday comparing the House and Senate versions of the Tax Cuts and Jobs Act, highlighting differences that include where tax brackets begin, the standard deduction, maximum rate on business income of individuals and the child tax credit.

For personal income tax, the House version of the tax bill consolidates the current seven income tax bracket rates to four but keeps the top marginal rate at 39.6 percent. The Senate version, on the other hand, keeps the seven brackets but reduces the top marginal rate to 38.5 percent. The House and Senate also both have slightly different rates for the standard deduction.

The House and Senate bills also treat pass-through income differently. The House bill introduces a top rate of 25 percent for members of pass-through entities while individual tax rates can go as high as 39.6 percent. The lower rate would apply to only 30 percent of income that can be categorized as qualified business income. The remaining 70 percent would be attributable to wages or labor income and be taxed at individual rates — a mechanism put in place to prevent tax avoidance maneuvers to characterize personal wages as business income. The Senate’s tax bill introduces a 23 percent deduction for pass-through income, bringing the top effective rate to 29.6 percent.

Both the Senate and House increase the child tax credit, but while the House increases it to $1,600, the Senate increases it to $2,000. The phase-out amount for joint filers comes at $230,000 for joint filers in the House version and at $500,000 in the Senate version. The House version creates a $300 per-person nonrefundable family tax credit for those not eligible for the child tax credit that would expire by 2023, whereas the Senate version would create a $500 nonrefundable tax credit for non-child dependents.

The House also repeals the alternative minimum tax for corporations and individuals, while the Senate retains both alternative minimum taxes but increases the exemption rate for individuals.

For homeowners, the House lowers the limitation on qualifying indebtedness for the mortgage interest deduction to $500,000, grandfathering in indebtedness incurred on or before Nov. 2, 2017, at $1 million. The Senate version keeps the mortgage interest deduction for new debt but eliminates the deduction for home equity interest indebtedness.

On the health care side, the House bill repeals medical expense deductions while the Senate retains them and decreases the floor for the medical expense deduction to 7.5 percent from 10 percent for taxable years 2017 and 2018. The Senate also reduces the penalty for failure to obtain health coverage under the Affordable Care Act to $0, while the House version doesn’t touch the penalty under the individual mandate.

The House version increases the estate tax exemption from $5 million to $10 million, reduces the gift tax rate from 40 percent to 35 percent for gifts made after Dec. 31, 2024, and repeals the estate and generation-skipping transfer taxes for estates of decedents dying, gifts made, and generation-skipping transfers made after Dec. 31, 2024. The Senate version doubles the basic exclusion amount for estate and gift tax purposes from $5 million to $10 million.

Martin J. Milita

The tax bill, reconciliation & the ACA

The tax bill making its way through Congress will more than likely get rid of the Affordable Care Act’s individual mandate.

As the House and Senate versions of the tax bill are reconciled, lawmakers are likely to agree on eliminating the requirement to purchase health insurance, Kevin Brady, who chairs the House Ways and Means Committee, said. (AP)

The Senate scrapped the mandate in the version of the Tax Cuts and Jobs Act that chamber passed early Saturday. The legislation passed in the House last month did not address the issue, but as the two versions of the tax bill are reconciled, lawmakers are likely to agree on eliminating the requirement to purchase health insurance, Brady, who chairs the House Ways and Means Committee, said in an interview that aired on CNBC.

Brady also said tax writers are likely to hold their ground on keeping the corporate tax rate at 20 percent despite President Donald Trump’s indicating on Twitter he was open to increasing that rate to around 22 percent.

When asked about the Senate’s decision to reinstate the corporate alternative minimum tax, Brady said the House and Senate would have to work out that difference. He said he still opposed the corporate and individual alternative minimum taxes because they are costly and complex.

House Majority Leader Kevin McCarthy, R-Calif., said in a separate interview on CNBC Monday he wanted to eliminate the corporate AMT because keeping it would destroy research and development.

McCarthy also addressed the disparity between the individual income tax rates in the House and Senate versions of the bills. The House bill would collapse the individual income tax brackets to four, with a top rate of 39.6 percent, while the Senate bill would maintain seven brackets and decrease the top rate to 38.5 percent.

McCarthy said he expected to have the tax bill finalized by the end of the year.

The House on Monday took a step toward reconciling the two bills by voting to send the legislation to a conference committee. House Speaker Paul Ryan, R-Wis., also named nine Republican lawmakers to the committee and designated Brady to chair the panel. House Democratic Leader Nancy Pelosi, D-Calif., meanwhile, named five Democrats to the committee, with Rep. Richard Neal, D-Mass., as ranking member.

New Jersey Transportation Funding- key elements of Senate bill.

The New Jersey state Senate adjourned on Monday before considering any proposals related to renewing transportation funding or cutting taxes. But the Senate is back in session tomorrow, setting the stage for what is expected to be another long day of negotiations.

At the heart of a new bill that was  passed by the state Assembly early Tuesday morning  is a proposed 1 percent reduction of New Jersey’s 7 percent sales tax.The cut would be phased in, starting at 0.5 percent next year and reaching the full 1 percent in 2018. It would come as part of a broader deal to renew the state Transportation Trust Fund (TTF) for another 8 years with a 23-cent gas tax hike.

The proposal featuring the sales-tax cut that has emerged this week actually is an alternative to another bipartisan plan that came out of the state Senate earlier this month.

That plan, sponsored by Sens. Paul Sarlo (D-Bergen) and Steve Oroho (R-Sussex), also features a 23-cent gas-tax hike, but instead of a sales-tax cut it calls for phasing out New Jersey’s estate tax and making a series of other tax cuts. They include lifting state income-tax exemptions on pensions, 401(k) plans, and other sources of retirement income over the course of several years. The Sarlo-Oroho plan would cost an estimated $870 million once all the cuts were fully implemented.

The new proposal, backed by Governor Christie and Assembly Speaker Vince Prieto (D-Hudson), scraps most of the tax cuts that are included in the Sarlo-Oroho plan in exchange for the sales-tax reduction. It does, however, keep changes to retirement-income exemptions that the two senators proposed, adding another $200 million to the potential cost of the Christie-Prieto plan.

The Senate has yet to consider the proposal, but if it were to be enacted, the sales-tax cut would represent New Jersey’s first reduction of a broad-based tax since 1994. It would also come at a time when the state has been experiencing revenue problems, including a $600 million budget hole that had to be closed with a series of cuts and other adjustments just last month.

The budget impact of the proposed sales-tax cut would start out modestly at $376 million during the 2017 fiscal year. And because it is part of a broader plan that involves the gas-tax increase to shore up the TTF, the cut would initially free up roughly $350 million in sales-tax revenue that’s currently being used to prop up the deeply indebted trust fund.

Going forward, the impact of the sales-tax cut on the budget would rise to an estimated $1.6 billion once fully phased in during the 2019 fiscal year, according to the nonpartisan Office of Legislative Services. Because all of the more than $1 billion in annual revenue that would come in from the 23-cent gas-tax hike would be constitutionally dedicated to funding transportation projects,  the sales tax cut  would not be offset, leaving a gap on the state budget.

Supporters predict that gap would be closed by economic growth, but if that growth doesn’t materialize, the hole would have to be filled with spending cuts or other tax hikes since the state constitution requires a balanced budget.

Complicating the issue even further is a planned constitutional amendment, backed by Democratic legislative leaders and public-worker unions, that call’s for revenue growth to help fund a series of ramped-up state contributions to the presently underfunded public-employee pension system. If voters approve the amendment this fall, it would mandate spending on the pension payments to increase from $1.3 billion this fiscal year to over $3 billion just as the full impact of the sales tax-cut would take effect.

New Jersey’s sales tax is rooted in a 1966 law that established a 3 percent rate. That was increased to 5 percent in 1970, and to 6 percent in 1983. The rate was lifted to 7 percent in 1990 under then-Democratic Gov. Jim Florio, only to be reversed in a backlash in 1992.

Another increase restored the rate to 7 percent in 2006 under then-Democratic Gov. Jon Corzine, but only after a six-day shutdown of state government. At the same time, the range of services that are subject to the sales tax was expanded, though New Jersey still offers exemptions for clothing, groceries and necessities.

Unlike many other states, New Jersey does not allow sales taxes to be levied at the local level. In fact, specially designated Urban Enterprise Zones allow many struggling urban areas to charge a lesser rate of 3.5 percent.

Notably, sales tax collections have been on the rise; while income tax is subject to significant volatility, the sales tax has been a steady performer for the state budget over the last several years. It generated $7.5 billion in revenue during the 2010 fiscal year, and $7.8 billion during the 2011 fiscal year. Sales tax collections then steadily improved from $8 billion during the 2012 fiscal year to $8.8 billion through the 2015 fiscal year. The latest projection for the current fiscal year, which ends at midnight tomorrow, is for $9.3 billion, and Christie’s administration is forecasting a $9.6 billion haul during the 2017 fiscal year.

Finance Panel Gets Early Jump On Renewing Tax Extenders

The Senate Finance Committee on Tuesday approved a bill to renew for another two years the package of so-called tax extenders, a collection of more than 50 targeted tax benefits for businesses and individuals.

The committee voted 23-3 in favor of the legislation, which now moves to the Senate floor. Committee Chairman Orrin G. Hatch, R-Utah, said renewing the package, which expired at the end of last year, would give taxpayers more certainty and give lawmakers time to figure out how to extend some of the provisions permanently.

The tax extenders are typically renewed by Congress every one to two years. Lawmakers last renewed the extenders in December, but they expired mere days later. Congress has gotten into the habit of allowing the provisions to expire and then renewing them retroactively at the end of the year so taxpayers can take advantage of them when they file their tax returns the following year.

To avoid endlessly repeating the cycle, some have tried to enact permanent policy for some of the most popular extenders, such as the tax credit for research and development, but they have so far been unsuccessful. Last year, former House Ways and Means Chairman Dave Camp, R-Mich., put together a deal with former Senate Majority Leader Harry Reid, D-Nev., that would have permanently extended several of the provisions, but that deal was scuttled by a veto threat from President Barack Obama, who said the deal would not have done enough for the middle class.

In February, the House approved a number of bills permanently renewing provisions such as the research credit and the deduction for state and local sales taxes. The changes are pending in the Senate.

One of the provisions expected to come at the highest cost is an extension of the renewable production tax credit, under which taxpayers can claim a 2.3 cent per kilowatt-hour tax credit for wind and other renewable electricity. That is expected to cost nearly $10.5 billion over 10 years, according to the Joint Committee on Taxation. At the markup on Tuesday, many Republicans on the committee advocated for phasing out the tax credit, while some Democrats defended it or suggested that incentives for oil and gas production be phased out as well.

The version of the bill passed by the committee contained some small changes introduced by Hatch, including one revenue raiser that would requiring mortgage lenders to provide more information to the Internal Revenue Service to improve compliance. That measure was also included in a bill to pay for an extension of the Highway Trust Fund passed by the House last week.

—By Martin J. Milita, Jr., Esq. Senior Director

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Foreign Profits Plan Could Be Starter For Tax Reform

U.S. corporations are currently storing roughly $2 trillion in profits offshore and Obama wants to tap into that money through a one-time 14 percent repatriation tax and a 19 percent minimum tax on future foreign earnings. Republican lawmakers haven’t embraced  Obama’s foreign profits tax proposals warmly, but the plan’s similarity to ideas pitched by some in the GOP may set it as an opening bid for business tax reform, particularly since House Ways and Means Chairman Paul Ryan wants to start the reform process by summer’s end.

The similarity between Obama’s plan and one pitched by former Republican House Ways and Means Committee chairman Dave Camp shows there is some space for negotiation — space that will be crucial as Ryan tries to solidify reform efforts in the coming months.

Obama unveiled his international tax plan as part of his 2016 budget blueprint, which the White House released at the beginning of the month. Under the plan, U.S. companies will no longer be allowed to defer taxes on their foreign earnings until they are returned to the U.S. Instead, corporations would pay a one-time tax of 14 percent on so-far untaxed offshore profits and a minimum tax of 19 percent on future earnings.

According to the budget, the 14 percent repatriation tax could raise $268 billion to help pay for a $478 billion, six-year reauthorization of the Highway Trust Fund, which is expected to run out of money in June. The minimum 19 percent tax would raise $206 billion over 10 years, the budget says.

By way of comparison, Dave Camp proposed an 8.75 percent repatriation tax in a comprehensive tax reform proposal he released last year. Camp also wanted to place a minimum 15 percent tax on companies’ intangible earnings, regardless of where they were earned.

Meanwhile, Sens. Rand Paul, R-Ky., and Barbara Boxer, D-Calif., also support a repatriation tax, albeit at a much smaller 6.5 percent rate. At the end of January, the bipartisan duo introduced legislation that would give companies five years to bring their deferred offshore earnings back to the U.S. and would use that revenue to fill the Highway Trust Fund, much like the Obama proposal would.

Meanwhile, it does appear that both sides of the aisle are seriously considering some sort of comprehensive reform plan, which could be aided by the similarities in Camp and Obama’s international tax proposals.