US Tax Reform: The Fight Continues
The US Senate Finance Committee introduced its version of a tax plan on November 9, 2017 in the continued efforts of US tax reform. Although similar to the House bill introduced on November 2, 2017, there are enough differences to ensure a significant battle over the next few weeks. The highlights of the House bill are described in an earlier blog post. This post will describe some of the differences and how the two competing bills will proceed.
Both versions propose to lower individual tax rates — the standard deduction would double to $12,000 for single filers and $24,000 for couples.
Itemized deductions are eliminated or limited, including state and local taxes, medical expenses, and student loans. Plus, the mortgage interest deduction may change. The Senate bill eliminates the state and local tax deductibility while the House bill provides for a limited property tax deduction. Under the Senate version, the home mortgage interest deduction is unchanged.
The House version has four tax brackets, while the Senate bill has seven, as we have now, but lowers the top and the bottom rates.
Both versions lower the corporate tax rate from the 35 percent that it is today, the highest rate in the developed world when the states are included, to 20 percent, but not until 2019 under the Senate bill.
The Estate Tax, which would be eliminated entirely in 2024 in the House bill, remains unchanged in the Senate bill but with an increased lifetime exemption of $11 million.
Under Congressional rules, if the Senate and the House each pass differing tax bills, they will need to form a “conference committee” composed of members of both chambers. The conference committee will try to negotiate a compromise bill that can win approval in each House of Congress. Alternatively, one chamber could simply take the other chamber’s bill and pass it but that seems unlikely given the differences.
After a compromise bill is drafted, the Congressional Budget Office will have to conclude that the bill will not increase the deficit after the first 10 year period as required by Senate rules (if the Republicans want to avoid a filibuster by the Democrats). This rule applies as the Republicans will have to pass the bill with few, if any, Democrat votes. 60 votes are required to avoid a filibuster and the Republicans do not have the votes. This leaves the Republicans with several options:
- They could pass significant tax cuts that expire after 10 years.
- They could pass smaller permanent tax cuts.
- They could split the bill into several separate bills some of which could attract Democrat votes and pass with the necessary 60 votes.
- Senate majority leader McConnell could overrule the Senate parliamentarian, the so called “nuclear option”, and pass the bill with a simple majority. This of course has consequences when your party is no longer in the majority as the Democrats discovered after they changed the rules for approval of federal judges.
As is the case with the House bill, many of the tax reform changes will not benefit taxpayers living abroad in countries in which the local tax rates are higher than the US rates. More importantly, neither tax reform bill will:
- Eliminate the citizenship basis of worldwide taxation for US individuals
- Eliminate the 3.8% Net Investment Income Tax
- Eliminate any provisions of FACTA
Watch this space…
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