Tax bill raises red flags for Senate GOP – The Hill

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The House Republican tax reform package has put Senate Republicans in a tough spot, much like the House-passed ObamaCare repeal bill did earlier this year.

The legislation is expected to pass the House, starting a tougher battle in the Senate, where Republicans control 52 seats and can’t pass a bill if they suffer more than two defections and Democrats remain unified.

At least a half dozen Senate Republicans have already raised concerns about various proposals in the tax measure, setting the stage for arduous negotiations in the upper chamber.

Senate Republican leaders have assured their colleagues that the Senate Finance Committee will write its own bill and urged them to withhold judgment on the House measure.

“They’ve told us the House bill is just a shell and we’ll have our own bill. They’ve asked to hold off on commenting and to not pick it apart,” said a Republican senator summarizing the instructions that Senate Majority Leader Mitch McConnellAddison (Mitch) Mitchell McConnellGOP Senate hopeful rips McConnell for ‘smearing’ conservativesOvernight Finance: House adopts Senate budget, taking step to tax reform | GOP worries Trump feuds will endanger tax plan | Trump talks NAFTA withdrawal with senators | Treasury calls for looser oversight of insurersTrump’s Senate oversight holiday must endMORE (R-Ky.) gave during a Thursday lunch meeting.

The House Ways and Means Committee unveiled its tax bill Thursday morning. It quickly came under fire for setting a new tax rate for pass-through businesses and for limiting the mortgage interest deduction to the first $500,000 of debt.

Sen. Ron JohnsonRonald (Ron) Harold JohnsonGOP senator: ‘Shared goals and areas of agreement’ will unite RepublicansJeff Flake knows the GOP is in trouble, and so does the baseBipartisan health plan faces new challenge from conservativesMORE (R-Wis.) is not happy with the formula the House bill sets for taxing pass-through businesses, which under current law pay taxes at the higher rates that individuals now pay.

The House bill would count 70 percent of a pass-through business’s revenue as wages, taxed at the individual rate, with the remaining 30 percent taxed as a return on capital at a new rate of 25 percent.

But Johnson argues that small businesses will wind up paying a blended rate of 35 percent, well in excess of the 20 percent tax rate the House bill sets for big companies classified as C-corps.

“One issue I know that has to be fixed is the whole issue with pass-throughs,” said Johnson, who called the House language on small business taxation “completely unacceptable.”

Johnson, the former CEO of a plastics company, said his House colleagues don’t understand the impact of the proposed rate on business.

“What you really have is a blended rate of about 35.5 percent. That’s a 15-percent differential” between corporate and small-business rates, he said.

Juanita Duggan, president of the National Federation of Independent Business, on Thursday said the House bill “leaves too many small businesses behind.”

Another provision raising red flags in the Senate is a proposal to limit the mortgage interest deduction to the first $500,000 of mortgage debt; the threshold is now set at $1 million. The new standard would not be retroactive, applying only to newly purchased homes.

The National Association of Home Builders has panned the House bill, saying it gives large corporations a tax break at the expense of middle-class homeowners.

Sen. Tim ScottTimothy (Tim) Eugene ScottGOP tiptoes toward long-held dream to kill estate taxOvernight Energy: EPA cracking down on legal settlements with green groupsCongress takes Wells Fargo, Equifax to task; now it must actMORE (R-S.C.), a member of the Finance Committee, says mortgages over $500,000 are common in expensive housing markets in California, New York and the District of Columbia.

“I prefer that it be higher,” he said. “In California, New Jersey, D.C., the definition of the average house is going to be significantly higher [in price] with a whole lot less square footage.”

“I want to make sure that we’re not penalizing those folks who live in places with high valuation which leads to higher loan values,” Scott said.

Finance Committee Chairman Orrin HatchOrrin Grant HatchOvernight Cybersecurity: Lawmakers grill Trump officials over Kaspersky threat | Trump camp distances itself from data firm | What we know about Bad Rabbit | Conservative groups back data privacy billRight-leaning groups back international data privacy billOvernight Health Care: Bipartisan health plan faces new challenge from conservatives MORE (R-Utah) said of the House proposal to lower the mortgage interest tax deduction limit, “I’m not sure that is going to fly.”

But whittling away at the offsets that pay for the bill is going to draw scrutiny from fiscal hawks such as Sens. Bob CorkerRobert (Bob) Phillips CorkerTillerson eliminates key State Department sanctions office: reportOvernight Cybersecurity: Top Dems seek data from GOP analytics firms | Georgia election server wiped after lawsuit | Corker says Trump officials implementing Russia sanctionsCorker: Trump officials moving forward with delayed Russia sanctionsMORE (R-Tenn.) and Jeff FlakeJeffrey (Jeff) Lane FlakeGOP Senate hopeful rips McConnell for ‘smearing’ conservativesDallas Morning News: Cornyn ‘betrays’ GOP by backing Roy MooreMichael Steele: Trump’s feud between Flake and others is personal, not politicalMORE (R-Ariz.), who want to make sure the estimated cost of the bill isn’t kept in check with accounting gimmicks.

“I don’t want to balloon the deficit,” Flake said.

Two key middle-class tax credits in the House bill, the non-child dependent tax credit and the family-flexibility credit, would phase out after five years to reduce the projected cost of the bill.

A major business tax break that would allow companies to immediately claim 100 percent expensing for capital investment would also sunset in five years.

Skeptical lawmakers are questioning how realistic that timeline is, as there would be intense pressure to renew the popular tax credits.

Senate Republicans are also raising concerns over the new tax brackets set up by the House bill.

Some members, such as Sens. David Perdue (R-Ga.), Steve DainesSteven (Steve) David DainesHigh stakes as Trump heads to HillOvernight Energy: EPA to repeal emissions rule for trucks | Disaster relief bill clears Senate hurdleOvernight Regulation: Treasury slams consumer bureau’s arbitration rule | EPA considers repealing truck emissions rule | GOP senators offer wildfire management billMORE (R-Mont.), Lisa MurkowskiLisa Ann MurkowskiTrump’s Senate oversight holiday must endHannity: GOP senators who won’t back Trump should resignPence breaks tie to nix Obama-era consumer arbitration ruleMORE (R-Alaska) and Susan CollinsSusan Margaret CollinsTrump’s Senate oversight holiday must endSenate budget just the latest attack on seniorsHannity: GOP senators who won’t back Trump should resignMORE (R-Maine), have balked at raising the rate for the lowest income bracket from 10 percent to 12 percent.

While taxpayers in the lowest bracket would be protected from having to pay more in taxes by the doubling of the standard deduction, these senators worry about the “optics” of raising the rate for the lowest bracket while slashing rates for corporations and wealthy individuals.

Other GOP senators aren’t happy with the amount of tax relief in the bill for the middle class, calling it inadequate.

“I still think we need to work the brackets and the rates a little lower for those in the middle,” said Sen. Rand PaulRandal (Rand) Howard PaulDallas Morning News: Cornyn ‘betrays’ GOP by backing Roy MooreJeff Flake knows the GOP is in trouble, and so does the baseCornyn backs Moore in Alabama Senate raceMORE (R-Ky.).

Paul noted that people earning up to $416,700 in the current 33-percent tax bracket would be kicked up to the 35-percent bracket under the House proposal.

He wants to add language that would repeal ObamaCare’s individual mandate requiring people to purchase health insurance, which would generate an additional $300 billion in revenue.

“I think there’s some movement on the Senate side. We talked about it at lunch again today and there is some sentiment toward doing this,” Paul said.

Sen. Tom CottonTom CottonSenators introduce surveillance reform billOvernight Defense: Kelly defends Trump on calls to families of fallen troops | Pentagon launches probe into deadly Niger attack | McCain floats subpoenaTrump changes to Iran deal face criticism from both sidesMORE (R-Ark.) endorsed the idea last weekend when he tweeted that, “repealing mandate is itself a tax cut for working families!”

Sen. Ben SasseBenjamin (Ben) Eric SasseDallas Morning News: Cornyn ‘betrays’ GOP by backing Roy MooreFlake says he won’t back Roy Moore, citing Muslim remarkTrump warns: Don’t underestimate ‘UNITY’ of GOPMORE (R-Neb.), meanwhile, on Friday raised alarm over a provision in the House proposal that would eliminate the tax credit for adoptions.

“Being pro-life means being pro-adoption. Congress must remember this as we work through the details of tax reform in the coming weeks,” Sasse tweeted.

Paul and other Senate Republicans are also grumbling over the House proposal to keep the top tax rate of 39.6 percent in place for individuals who earn over $500,000 or couples who earn over $1 million.

“We should bring all rates down,” Paul said. “The top one percent pay a third of the income tax, maybe 40 percent of the income tax. So if you really want to return money to the private economy, who have to be less focused on who gets what money.”

Asked about keeping the 39.6 percent for the wealthiest taxpayers, Scott said, “I can’t say that I’m okay with it yet.”

Other senators, however, such as Collins and Perdue, have voiced support for keeping the highest rate in place for the nation’s wealthiest individuals and families.

Unlike the healthcare debate, the Senate will unveil its own tax plan next week instead of waiting for the House to pass its bill.

Senate Republican Conference Chairman John ThuneJohn Randolph ThuneTrump feuds endangering tax reformFlake, Corker push Trump criticism to new levelOvernight Health Care: Bipartisan health plan faces new challenge from conservatives MORE (S.D.), a member of the Senate Finance Committee, said he and other members of the tax-writing panels are trying to hammer out agreements on small business tax rates and other controversial issues.

“We’re still kind of working through the rate structure over here and we’ll see where we end up,” he said.

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