Hatching a New Tax Plan (Nov. 16)

Update 225 — Hatching a New Tax Plan:

Chair’s Re-Mark a Bid to Save the Bill

Late Tuesday night, Senate Finance Chair Orrin Hatch filed a significantly modified mark of his Committee’s tax bill.  As Committee Democrats have are processing the changes this week, we drill down on some of the major revisions to the bill, the rationale behind the changes, and the implications for the bill’s prospects.

Meanwhile this afternoon, the House bill passed this afternoon with a final tally of 227-205, with 13 Republicans dissenting; all but one were from New York, New Jersey, or California, amd dissent was mainly over the the loss of the state and local deduction.

But the biggest concerns are the mounting defections, equivocations, and threats to bolt, notably from GOP Sens. Susan Collins, Bob Corker, Ron Johnson, Rand Paul, and John McCain, among others.  Do Hatch’s revisions address and satisfy the demands of the wobbly Republicans without losing votes?

Best,

Dana

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Individual Mandate Repeal

The new Chair’s mark this week includes a significant surprise: the repeal of the individual mandate in the Affordable Care Act. The modification eliminates the penalty of the individual mandate tax. Such a change, if enacted, would have a drastic impact on insurance markets. The Congressional Budget Office estimates that premiums would increase ten percent due to payments for uncompensated care and that four million Americans would lose insurance in 2019 alone, and a total of 13 million would lose coverage by 2027.

Given the embarrassing debacle with ACA repeal that Republicans endured just a couple months ago, it is surprising that Republicans would decide to combine the healthcare issue with the tax bill.  But repealing the mandate would save the federal government $338 billion over the next decade, with additional savings in subsequent years. This is especially enticing for Sen. Hatch, who must make the tax bill Byrd Rule-compliant in order to avoid its certain defeat by a 60-vote point of order against raising the deficit beyond the next 10 years.

Political wrangling is an equally important factor in Hatch’s calculus.  With Sen. Johnson announcing his plans to defect from the tax effort yesterday, Hatch can afford to lose only one more Republican and still pass his bill.  No Democrat will vote for it.  To the extent that the ACA still represents a sensitive issue for several GOP Senators — including the repeal of the individual mandate — helps Hatch keep his ducks in a row with conservative members of his caucus.

But the move is not without risks.  Sen. Collins, one of the three GOP no-votes that sunk the Senate’s last attempts to undo the ACA, has already raised concerns about the repeal of the individual mandate. Sens. Murkowski (R-AK) and McCain also voted with Collins against the ACA repeal.

Indiv. Cuts Temporary, but Corp. Are Permanent

Hatch’s modified mark makes individual rate cuts temporary while the corporate cut to 20 percent is permanent.  Changes to the individual code sunset after year eight, in 2025.  Hatch makes tax changes for individuals temporary to prevent the overall bill from adding to the deficit after ten years, helping it comply with the Byrd Rule. Changes to the individual tax code save $77.8 billion from the previous mark.

Republicans make the corporate rate cut permanent, making it all too clear who GOP the party aims to benefit in this bill.   through tax reform.  But keeping the 20 percent corporate rate permanent is the only way to keep several wobbly Republicans on board.  While the change may help make the legislation Byrd rule compliant, it opens the GOP up to fierce criticism from Democrats for providing permanent tax cuts to large corporations while giving only temporary tax cuts to individual taxpayers.  As Sen. Stabenow repeated this morning: this bill is about trickle-down economics.

Pass-Through Rates

The Chairman’s modification also includes some drastic changes to the treatment of pass-through businesses.  The original 17.4 percent deduction was applicable to only half of W-2 wages. Under Hatch’s mark, this limit wound be eliminated for joint filers with incomes under $500,000. In addition, the modification expands the number of service businesses that can claim the pass-through rate, raising the threshold from $150,000 to $500,000.  This expansion would allow many relatively high-income professionals to claim the deduction.

Expanding the 17.4 percent deduction allows Hatch to argue that his tax plan helps small businesses.This provision is still less generous than the break that pass-through entities would receive under the House version of the bill — an important factor in Senator Johnson’s defection — but it is less of a fiscal burden. In a boon to Hatch’s efforts, the National Federation of Independent Business, one of the largest small business lobbying groups, threw its support behind the Senate bill last night.  He hopes this will keep Republicans with similar concerns from following Senator Johnson out the door.

CTC Expanded

The modified mark increases the Child Tax Credit (CTC) to $2,000 per child.  Republicans like Marco Rubio (R-FL) and Mike Lee (R-UT) had called for this repeatedly over the last two weeks. Under current law the CTC equals $1,000. The previous mark allowed a CTC of $1,625. Increasing the credit to $2,000 is aimed at countering Democratic claims that the tax legislation is skewed toward the wealthy and businesses and guarantees support from Senators like Rubio.

Democrats on the panel pointed out that the mark raises the cap of those eligible to claim the credit to $500,000, in order to benefit more well-off taxpayers.

Modified Brackets

The new mark includes minor adjustments to the seven-bracket system reintroduced by the Senate. The Senate tax bill, in contrast to the House’s, expands the 10 percent bracket for single filers earning from $0 – $9,525, and joint filers earning $0 – $19,050.

Other brackets were adjusted slightly to reduce taxes for middle income taxpayers as compared with his original proposal as follows: the rate at the third bracket decreases from 22.5 percent to 22 percent as its upper bound expands from $60,000 to $70,000. The fourth bracket experiences a rate cut of 1 percentage point and falls to 24 percent while its income range shrinks by $20,000; the lower bound increasing to $70,000 and the upper bound decreasing by $10,000, to $160,000. At the fifth bracket, the rate decreases to 32 percent while the lower bound of the threshold decreases to include earners who make at least $160,000. These minor changes seem to be created for the benefit of middle-income earners.

Just Ahead

Democrats have taken full advantage of the opportunity to hammer Republicans for making the corporate tax cuts permanent while sunsetting individual cuts. They have also successfully rebranded the tax bill as a health care bill for repealing the individual mandate and throwing 13 million people off of health insurance.

As the markup continues to run and may continue through the weekend, expect a final committee vote early next week.  House leaders will likely request changes of Senate Majority Leader McConnell as Congress breaks for the Thanksgiving recess. The bill is expected, for now, to be considered on the Senate floor the first week after Thanksgiving for a final showdown with the fate of the Republican party on the line.