Senate Passes GOP Tax Cuts Package; House and Senate Bills Now Move to Conference Committee

House Republicans approved their version of the bill earlier this fall, also on a partisan vote. The House and Senate will now appoint conferees that will work to close the gaps between the House and Senate measures, before sending a compromise package back to the chambers for final approval. Republican leadership aims to have a final bill on the President's desk before Christmas. Of course, there is a slim chance that the House will simply accept the Senate bill and send it to the President.

Background and Analysis: The action in the Senate this week closely mirrored the ACA debate in late July when the wheeling and dealing that typically occurs behind closed doors reached the floor of the Senate chamber. However, unlike in July, Senate Republicans were able to put together a bill that finally passed the Senate very late into Friday night. The prospects for passage of the final bill, which was released Friday afternoon, remained unclear right up until the actual vote. However, Senate Republicans had picked up momentum earlier in the week as they slowly gathered support from Republican holdouts by modifying various sections of the bill.

A number of the changes made last week aimed to appease Senator Susan Collins (R-ME), a moderate member of the caucus who was part of the team of three Republican Senators that brought down the ACA repeal effort earlier this year. Senator Collins was particularly concerned that the Senate bill, which – unlike the House bill – repeals the ACA's individual mandate, would have a particularly pronounced impact on low-income Mainers. In order to win her support, Senate leadership agreed to include two provisions to 1) allow taxpayers to deduct up to $10,000 in state and local property taxes and 2) to lower the threshold of income that Americans must spend on medical expenses before claiming a deduction from ten percent to 7.5 percent for the next two years. Senator Collins was also able to extract a promise from Senate Majority Leader Mitch McConnell (R-KY) to support two bipartisan bills meant to help stabilize individual insurance markets by reinstating cost-sharing reduction payments to insurance companies (Alexander-Murray) and setting up reinsurance programs for older and sicker individuals (Collins-Nelson).

Another challenge facing Senate Republican leadership was the insistence by Senators Ron Johnson (R-WI) and Steve Daines (R-MT) that the bill include more generous deductions for companies organized as pass-through entities. Their support for the package was gained when Leader McConnell agreed to increase the amount of business income eligible to be deducted from the 17.4 percent mark in the original proposal to 23 percent.

Leader McConnell was also able to bring Senators Jeff Flake (R-AZ) and Lisa Murkowski (R-AK) on board by promising to work on providing "fair and permanent protections" for beneficiaries of the Obama-era Deferred Action for Child Arrivals (DACA) program and by including a measure to open the Arctic National Wildlife Refuge in Alaska to oil and gas drilling, respectively.

In the end, Senator Corker was the only Republican to vote against the bill, citing estimates from the Congressional Budget Office and the Joint Committee on Taxation that the legislation would increase the federal deficit by between $1 trillion and $1.5 trillion over the next ten years. However, Senate Republican leadership did make some changes to the legislation in order to pay for amendments included to attract crucial support in the final days. Among others, the final measure scaled back some planned tax cuts and increased a new tax on assets held overseas by American multinational companies. Most notably, they decided to maintain the alternative minimum tax on corporations and to trim the effects of the alternative minimum tax for high-earning individuals. Originally, the bill would have eliminated both those taxes entirely.

Republican Congressional leadership will seek to reconcile the House and Senate bills through a Conference Committee, before sending the bill back to both chambers for final approval. While there are differences between the House and Senate approved bills (see table below), the two sides generally agree on the scope and focus of the legislation. Republican leaders are racing to complete action before the end of the year.

That said, there are certain key differences that will need to be resolved. The House, for example, wants to cut the mortgage interest deduction in half, and eliminate it entirely for second homes. The Senate would only end it for home equity loans. Senate Republicans decided at the last-minute to abandon plans to repeal the Alternative Minimum Tax – a key part of House legislation. The House cuts roughly $65 billion out of education-related tax breaks, while the Senate leaves them mostly untouched. Senate Republicans have seven individual income tax brackets in their plan, while the House has four. House Republicans want to end the estate tax while the Senate would only temporarily ease it.

The political pressure on the Republicans to reach an agreement and approve the tax cut package – giving them a long sought after legislative win – is substantial.

For more information on tax reform or other matters, please contact Sheila P. Burke, chair of Baker Donelson's Government Relations and Public Policy Group.