The Republican tax bill that Congress will vote on next week would raise the one-time tax on businesses’ foreign earnings and includes other new revenue to pay for tax breaks needed to win support from Republicans. But lawmakers ditched several politically toxic measures that had been included in the House bill to make the budget math add up.
The final joint House-Senate conference bill would tax earnings held by corporations overseas at a one-time tax rate of 15.5 percent for cash and 8 percent for earnings reinvested into buildings or equipment. Earlier versions of the tax bills featured lower rates. That increase raised an additional $41 billion, relative to the Senate version of the bill.
Republicans also moved other parts of the bill around to free up revenues. "There were adjustments made throughout the whole tax reform bill," conference committee chairman Rep. Kevin Brady of Texas said. "There wasn’t any one or two provisions that allowed us to stay under the $1.5 trillion."
Another major revenue-raiser was to limit the tax break for "pass-through” businesses, which file through the individual side of the tax code, providing nearly $63 billion in the final bill versus the Senate-passed one. Those businesses, though, would still effectively have their top rate lowered to 29.6 percent, thanks to the lower top individual tax rate. Pass-through businesses make up the majority of businesses in the country and about half of total business income.
A third big offset was to require firms to write off research costs more slowly, starting in 2022. That provision, viewed as a gimmick by outside experts, would save $58 billion.
Those changes were made to help include all the tax breaks that Republicans wanted in the bill while staying under the cap of a $1.5 trillion tax cut over 10 years.
The total tax cut amounts to $1.456 trillion, according to an estimate from the Joint Committee on Taxation included with the filing of the report.
The conference bill will feature a 21 percent corporate rate, rather than the 20 percent Republicans previously sought.
But that rate will kick in in 2018, rather than being delayed as it was in the Senate bill. As in both earlier versions of the bill, businesses would be allowed to immediately write off the cost of all new investments in equipment for five years, rather than have to follow complicated depreciation schedules for deducting the cost.
GOP taxwriters enlarged the individual rate cuts in the final bill. The top tax rate is 37 percent, lower than the 39.6 percent under current law and the 38.5 percent set in the Senate bill.
That top rate will apply to individuals with income over $500,000 and couples earning more than $600,000.
Altogether, there will be seven brackets. Republicans said more brackets were needed to ensure that lower brackets received tax cuts.
Republicans further lowered individual rates to address one of the major potential political liabilities with the tax bill, the possibility that some taxpayers in states such as New York and California could see tax increases because of the bill’s limitation on state and local tax deductions, or SALT.
"All that was done to drive tax relief for everyone, regardless of where they live," Brady said.
Lower rates would help with that problem. So would another big change made in conference: The bill would keep the proposed $10,000 cap in total state and local tax deductions, but make that applicable not just to property taxes but also to income or sales taxes.
The individual alternative minimum tax would remain in the tax code, but the amount of exempt income would be significantly increased, up to $500,000 for individuals and $1 million for couples. Fully 94 percent of taxpayers would avoid the AMT, aides said.
Another change to the bill was to make the new $2,000 child tax credit refundable up to $1,400, a late change made to earn the support of Sen. Marco Rubio, R-Fla. The cost of that addition was offset by making the credit only available for children up to age 17, the same as in current law but one year earlier than the Senate bill. The credit also phases out at incomes above $400,000, much higher than current law but below the $500,000 mark in the Senate bill.
For the most part, the final bill will resemble the Senate version, which in turn was written to comport with the bill that the House previously passed.
Most notably, all the individual tax cuts would expire in 2025. The expiration of the tax cuts helped Republicans stay below the $1.5 trillion limit, but they say that they intend for future Congresses to re-up the breaks.
Lawmakers tossed several of the House bill's controversial provisions, including the elimination of the deductions for medical expenses and student loan interest and the treatment of graduate school tuition waivers as taxable income.
The mortgage interest deduction will be kept but capped at loan balances of $750,000, a compromise halfway between the Senate and House bills.
As in the Senate bill, the estate tax would not be eliminated. Instead, the bill raises the exemption level for bequests, doubling it from today’s level of $11 million for a married couple.
The conference bill would also follow the Senate measure by zeroing out the penalties in the Obamacare individual mandate. That major change in health care policy, though, would only take effect in 2019, meaning that the mandate will be in force for 2018.