Final Act of the Tax Reform Play Starts This Week
At around 2 a.m. on December 1st, the Senate passed its version of tax reform. A flurry of late night amendments and haggling produced a bill that attracted 52 votes. Senate Republican leaders are using arcane Senate budget rules that allow them to pass a bill by a simple majority, thereby avoiding the need to secure the 60 votes normally required to pass legislation. As I noted in previous articles on tax reform, the use of the special budget rules requires tax writers to sunset many of the individual tax cut provisions because they cannot continue to increase the government’s deficit after a set number of years. As a result, many of the tax cuts related to individuals sunset on December 31, 2025 and the Senate bill delays the effective date of corporate tax rate reductions to 2019.
Constructing a tax bill of this magnitude is a complicated process of matching tax increases that generate revenue with tax cuts that reduce revenue, involving hundreds of provisions and trillions of dollars. Then imagine presenting this proposal to 100 members of the Senate who all have different interests and priorities with the goal of securing the support of 50. Much of this work is done behind the scenes by members’ staff who work many long nights constructing the tax reform bill that includes their bosses’ priorities. Every proposal or amendment to the tax reform bill must be scored by government economists to determine if it raises or loses revenue and how it changes the balance of the entire tax reform package. The current tax reform package includes over 120 provisions with a net cost of about $1.5 trillion (i.e., includes $4 trillion of tax increases of various sorts and $5.5 trillion of tax cuts for individuals and businesses).
The next step or final act in the tax reform plan is to reconcile the Senate and House bills in what is called a “conference committee.” The conference committee will convene for appearances (which consists of a subset of Ways and Means and Senate Finance Members), but the real negotiations will be handled by House and Senate Leaders and the White House - mostly the “big six” that started the process six months ago: Treasury Secretary Mnuchin, National Economic Council Director Gary Cohn, Senator Orrin Hatch, Chairman of the Senate Finance Committee, Senate Majority Leader Mitch McConnell, Congressman Kevin Brady, Chairman of Ways and Means, and Speaker of the House Paul Ryan. Forging a single bill that can pass both the House and Senate is the most difficult task involved in the tax-writing process because the two bills represent nearly nine months of negotiations in the respective houses of Congress. Even the slightest changes can upset and derail the entire legislative process and jeopardize final passage considering Senate Republicans can only lose two votes and secure final passage.
For those who have been following my articles, Senate negotiators made last-minute changes to the Senate Finance Committee bill to secure a majority of votes to pass the Senate. Many of the late-night amendments were hand written on the base bill on the Senate floor.
On a planning note, the tax rate on pass through entities which is at the core of both the House and Senate bills may end up higher than the tax rate on regular C corporations under the final bill. In recognition of this fact, Senate tax writers added a provision that eases the transition to C corporations if pass through entities wish to change their form of operation to take advantage of the lower rates. I highlight the major changes in the Senate bill before passage below:
- Further lowers the tax rate on business income from S Corporations, partnerships and sole proprietorships, which is below the tax rate provided in the House bill.
- Allows deduction for state property taxes to $10,000, which is now in line with the House bill.
- Reinstates the individual and corporate alternative minimum tax (Senate needed the revenue).
- Eliminates the provision that would have limited retirement contributions to 403(b) and 457 plans to prevent double dipping.
- Extends equipment expensing for an additional four years before it sunsets.
- Permits medical expense deductions exceeding 7.5% of AGI.
- Increases the tax rate on foreign income that is repatriated.
Looking at this from 20,000 feet, the differences in the House and Senate tax reform bills do not seem insurmountable. The final deal will shade toward the Senate bill. As we say at the end of each article – stay tuned! Final negotiations will bring further changes and many that will impact your personal and business taxes.
Boston Private is pleased to announce a partnership with Doug Fisher, a Washington Policy expert, who will offer a series of insights into a number of reform proposals making their way through Congress in 2017. Doug is Director of Retirement Policy at the American Retirement Association. In this role, Doug works with the ARA membership to protect, advise and grow their businesses through ideation and advocacy in the benefits area. Before joining ARA, Doug led Fidelity's legislative policy and thought leadership development teams involving retirement, health and welfare benefit plans. Doug has advised many Fortune 1,000 companies on the impact of legislation and regulation on the design and delivery of benefits. Before joining Fidelity, Doug served as tax counsel to the U.S. Senate Finance Committee and was involved in writing the pension, health and insurance provisions of the Small Business Job Protection Act of 1996; the Balanced Budget Act of 1997, including the Roth IRA, Simple retirement plan, medical savings account (predecessor to the health savings account); and the Health Insurance Portability and Accountability Act of 1996 (HIPAA).
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