Senate Passes Sweeping Revision of U.S. Tax Code
By Richard Rubin and Siobhan Hughes
WASHINGTON--The Senate passed sweeping revisions to the U.S. tax code past midnight Saturday after Republicans navigated a thicket of internal divisions over deficits and other issues to place their imprint on the economy.
The bill, which included about $1.4 trillion in tax cuts, would lower the corporate rate to 20% from 35%, reshape international business tax rules and temporarily lower individual taxes. It also touched other Republican goals, including opening the Arctic National Wildlife Refuge to oil drilling and repealing the mandate that individuals purchase health insurance, which would punch a sizable hole in the 2010 Affordable Care Act. But some objectives, such as repealing the alternative minimum tax, fell by the wayside in last-minute wrangling.
"In the end it all came together and we're pretty excited about what we've been able to accomplish for the American people," Senate Majority Leader Mitch McConnell (R., Ky.) said in an interview Friday. "We've got a corporate rate at 20% that we think makes us competitive in the world again and provided substantial middle-income tax relief."
The bill passed 51-49, with all but one Republican voting for it and all Democrats voting against. The sole Republican, Sen. Bob Corker of Tennessee, stated his opposition before the vote, citing worries it would expand budget deficits.
The bill's ultimate passage would mark a legislative victory for President Donald Trump and his fellow Republicans. Mr. Trump has made the tax overhaul a centerpiece of his economic policy goals, focusing on a rewrite of business taxes, which he has argued make the U.S. uncompetitive internationally. The bill could also give lawmakers something to campaign on in the 2018 midterm elections.
Democrats blasted the bill, calling it an unacceptable giveaway to corporations and the wealthy. They also criticized last-minute Republican adjustments and waved handwritten amendments around the Senate floor to show how hastily the changes were being made.
"A flurry of last-minute changes will stuff even more money into the pockets of the wealthy and the biggest corporations while raising taxes on millions in the middle class," Sen. Chuck Schumer of New York, the chamber's Democratic leader, said.
The House and Senate still need to reconcile competing versions of the tax plan, something GOP leaders hope to do by Christmas. The House and Senate bills overlap in many ways, and lawmakers expressed optimism about getting a final deal done.
"The bills are not all that different," Mr. McConnell said. "We tried to move ours somewhat in the House direction."
Senate Republicans called their bill an economic booster shot, their best chance to create faster sustained growth and higher wages. But it comes with risks. Congress's own nonpartisan analysis found that the economic benefits would be modest and fade over time.
The Joint Committee on Taxation determined that the tax cuts wouldn't pay for themselves, as Republicans promised. Instead the analysis found they would increase deficits by $1 trillion over a decade, even after accounting for economic growth.
Investors, for now, are more excited about the prospect of lower corporate taxes than about the risks associated with larger government deficits. The Dow Jones Industrial Average rose 673.60 points for the week, or 2.9%, to 24231.59. Yields on 10-year Treasury notes, which might be expected to rise if bond investors were worried about deficits, remain comfortably low, below 2.5%.
Senators began voting on amendments late Friday night and that continued into early Saturday. They defeated, 29-71, an attempt by Sen. Marco Rubio (R., Fla.) and Mike Lee (R., Utah) to expand the child tax credit for low-income families, which would have been paid for by setting the corporate tax rate at 20.94%.
Vice President Mike Pence broke a tie in favor of a proposal from Sen. Ted Cruz (R., Texas) to allow the use of 529 savings accounts to pay for elementary and secondary school costs, including private-school tuition.
Saturday's vote came after a week of long hours and frantic rewriting and deal-making. The GOP tax effort wobbled late Thursday after the Joint Committee on Taxation analysis raised the concerns of budget hawks about deficits. An attempt to add deficit countermeasures in the bill failed to clear parliamentary rules.
Mr. McConnell and his team salvaged the measure with a series of last-minute deals to sway wavering senators.
Sens. Steve Daines (R., Mont.) and Ron Johnson (R., Wis.) won bigger tax breaks for pass-through businesses such as partnerships and S corporations. Sen. Jeff Flake (R., Ariz.) secured more aggressive depreciation rules to encourage business investment after 2022.
Sen. Susan Collins (R., Maine) scored a $10,000 deduction for property taxes, an expanded but temporary deduction for people with large medical expenses, and a promise of future bipartisan health-care legislation to mitigate the effects of repealing the individual health-insurance mandate.
"This bill will provide much-needed tax relief and simplification for lower- and middle-income families, while spurring the creation of good jobs and greater economic growth," Ms. Collins said.
To help pay for some of those changes, Republicans increased a new tax on companies' stockpiled foreign profits to 14.5% for cash and 7.5% for illiquid assets, from 10% and 5% in a previous version.
Senate Republicans abandoned other goals. They preserved the alternative minimum tax instead of repealing it. They backed off a plan to abolish the estate tax. They retained seven tax brackets instead of collapsing them into three as planned. And after years of warning about the rising national debt and promising a tax overhaul that would be revenue-neutral, they chose to proceed despite warnings the measure would add to deficits in the long run.
Lawmakers released the final changes--moving around hundreds of billions of dollars--a few hours before the last vote, and there was no updated analysis of the bill's impact on taxpayers and the economy as Republicans moved toward voting on it.
"The Republicans have managed to take a bad bill and make it worse. It was chock-full of special-interest giveaways before tonight," Mr. Schumer said.
The bill would overhaul much of the U.S. tax system in ways that tax experts are only beginning to understand.
Mr. Trump and some Republicans set the 20% corporate tax rate as an immovable objective and despite some occasional doubts, the GOP stuck with it. That is a win for domestic retailers and manufacturers who have spent years building the political case for a lower tax rate.
Pass-through firms, which pay their business taxes through individual returns rather than corporate returns, won major concessions. They would get a 23% deduction from individual rates. More than half of U.S. business income goes to pass-throughs, and more than half of that goes to the top 1% of households.
Tax analysts said this deduction opens new and unprecedented avenues for tax avoidance, with individuals likely seeking to declare as much of their income as possible as lower-taxed business profits.
Even in a bill that provides sizable tax cuts to many, some taxpayers are set to lose. The bill would prevent individuals from deducting state and local income taxes. That is likely to raise federal taxes on upper-middle-class wage earners in high-tax states, such as California, Connecticut, Maryland, New Jersey and New York. They are all represented by Democrats in the Senate.
The standard deduction would be nearly doubled and the child tax credit would rise, while personal exemptions would be repealed. For many households, that combination would modestly increase the amount of earnings that aren't subject to income tax.
The bill also would push millions of households out of itemizing deductions. That would reduce the incentive to deduct mortgage interest and charitable contributions. But nonprofits, home builders and real-estate agents were unable to sway Republicans to reverse course on the measure.
Debt-reliant businesses would lose, too, under a provision that limits interest deductions to 30% of income.
Republicans said those changes were necessary to lower the rate and make other changes that would encourage investment in the U.S.
"The reforms that we make in this bill allow American companies to compete and win against those other countries around the world," Sen. John Thune (R., S.D.) said.
Kristina Peterson contributed to this article.
Write to Richard Rubin at email@example.com and Siobhan Hughes at firstname.lastname@example.org
(END) Dow Jones Newswires
December 02, 2017 02:10 ET (07:10 GMT)Copyright (c) 2017 Dow Jones & Company, Inc.