- The Senate and House versions of the Republican tax bill are significantly different, requiring a conference committee to hash out the discrepancies.
- Some of the key sticking points include a repeal of the so-called individual mandate for health insurance, the length of individual tax cuts, and more.
- The House voted on Monday to formally kick off the conference committee.
While both the House and the Senate have passed versions of the Republican tax plan, the fight remains far from over.
There is little doubt among investors and analysts that tax legislation will reach President Donald Trump’s desk. But negotiators now need to iron out significant discrepancies between the House and the Senate versions of the tax bill, called the Tax Cuts and Jobs Act, and pass that updated bill in both chambers.
The House voted on Monday to formally kick off the conference committee, and House Speaker Paul Ryan and Minority Leader Nancy Pelosi appointed conferees. Isaac Boltansky and Lukas Davaz, analysts at the research firm Compass Point, expect it to come out of negotiations with a compromise bill in mid-December.
“The conference committee process could be volatile, but we expect it to move quickly and odds favor the president signing a bill this year,” the analysts wrote on Monday. “We maintain our 75% odds of a tax bill passing.”
While confidence is high, here’s a rundown of the differences between the House and Senate bills:
- The corporate tax rate:
- House bill: cut to 20% from the current 35% starting in 2018.
- Senate bill: cut to 20% from the current 35% starting in 2019.
- Bottom line: Trump threw another wrench into the discussions on Saturday morning when he suggested the rate could end up at 22% to finance other cuts.
- The alternative minimum tax:
- House bill: repeals for both individuals and corporations.
- Senate bill: raises the threshold to qualify until 2026 and leaves corporate AMT.
- Bottom line: Maintaining the corporate AMT in the Senate bill would be a problem for many companies, as The Wall Street Journal’s Richard Rubin noted. It would undermine the value of things like the research and development tax credit.
- Individual tax bracket changes:
- House bill: shrinks the number of tax brackets to four and makes the cuts permanent.
- Senate bill: maintains seven brackets but with lower rates and different income levels – then cuts expire after 2025.
- Bottom line: This could be one of the most contentious issues. The Senate’s bill sunsets individual tax cuts to meet budget rules and maintains many deductions that the House bill cuts.
- Treatment of pass-through businesses:
- House bill: lowers the tax rate on pass-through business income to 25%, or 9% for lower-earnings firms.
- Senate bill: gives a 23% deduction to pass-through income.
- Bottom line: Both bills have guardrails to ensure that professional services companies like hedge funds and accounts firms don’t abuse the provision.
- Estate tax:
- House bill: doubles the threshold to qualify for the tax to a little over $11 million for an individual – then repeals the tax in 2025.
- Senate bill: doubles the threshold but reverts to the current level in 2026.
- Bottom line: The temporary nature of the threshold increase in the Senate bill will be contentious.
- The so-called individual mandate established by the Affordable Care Act:
- House bill: leaves intact the individual mandate, which requires most Americans to have health insurance or pay a tax penalty.
- Senate bill: repeals the individual mandate.
- Bottom line: While House Republicans earlier this year passed a bill to repeal and replace the healthcare law, also known as Obamacare, many more-moderate members opposed the measure.
- Mortgage interest deduction:
- House bill: lowers the mortgage interest deduction limit to $500,000 and prevents it from being used for second homes.
- Senate bill: leaves the deduction limit at $1 million.
- Bottom line: The housing industry is fighting the House version of the plan, so the final bill could be a blend of the two, with the higher limit and the second-home exclusion, according to analysts.
Most analysts think the final bill will end up looking more like the Senate’s version, since the GOP holds 52 seats in that chamber and therefore can afford only two defections to pass a tax bill along party lines. (The vice president would cast a tiebreaking vote.)
“Generally speaking, our sense is that the final conference committee report is likely to skew toward the Senate’s version given the narrower margin in the upper chamber,” Boltansky and Davaz said.