US Senate Presents A Different Take On Tax Reform

The Senate Finance Committee released its tax reform plan on November 9, presenting a draft bill with marked differences to that agreed by the House Ways and Means Committee on the same day.

The proposal was drafted by Finance Committee Republicans under the leadership of Senate Finance Committee Chairman Orrin Hatch (R-UT), based on the Unified Tax Framework agreed by the Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance in September 2017.

While said to adopt a similar “pro-growth approach” to the House Ways and Means proposal, the Senate plan differs in a number of areas.

The Senate bill would preserve the current seven income tax brackets, compared to the reduced four brackets proposed under the House bill. Under the Senate proposal, the zero tax bracket would be expanded, and a slightly lower 38.5 percent tax rate would be introduced for high-income earners (compared with 39.6 percent in the House Bill, in line with current law).

Both the Senate and House bills include a proposal to double the standard deduction, to USD12,000 for individuals and USD24,000 for married couples; to repeal the Alternative Minimum Tax; and eliminate the state and local tax deductions. Where the House bill would repeal the medical expense deduction, the Senate bill would retain it.

The treatment of the Child Tax Credit is also largely similar in both bills, with the Senate proposing to increase the credit from USD1,000 to USD1,650 (compared to USD1,600 in the House Bill). However, the Senate Bill would preserve the existing mortgage interest deduction, which the House Bill proposes to curb from USD1m to USD500,000.

The Senate bill also proposes to preserve the estate tax, which the House Bill would repeal for persons dying after 2024. The Senate bill also proposes to double both the estate and gift tax exemption for individuals, from USD5m to USD10m.

For businesses, the Senate Bill would also cut the corporate tax cut from 35 percent to 20 percent, but would delay implementation until January 2019. The bill proposes a new 17.4 percent deduction for certain pass-through businesses, which are taxed under the personal income tax regime, and enhanced Section 179 expensing. There is an exclusion from the deduction for specified service businesses, except in the case of a taxpayer whose taxable income does not exceed USD150,000, for married individuals filing jointly, or USD75,000 for other individuals.

The Senate Bill would tax multinationals’ offshore holdings under a repatriation tax proposal at lower rates than under the House bill. Cash holdings would be subject to a repatriation tax of five percent, rather than seven percent under the House proposal, and at 10 percent on non-cash holdings, rather than 14 percent as under the House proposal.

Both bills would cap the deduction for net interest expenses at 30 percent of adjusted taxable income, with exclusions for small businesses.

“This is just the start of the legislative process in the Senate. We expect robust committee debate on the policies in this bill, will have an open amendment process, and hope to report legislation by the end of next week,” said Hatch.