|Last night, the Senate Finance Committee released the Chairman’s mark of the Tax Cuts and Jobs Act of 2017 — a significant reworking of the House bill. Committee Chairman and 40-year Senate veteran Orrin Hatch will do everything he can to pass the tax cut he has dreamed of writing for decades.
Sen. Hatch knows his bill must satisfy the Byrd Rule, an arcane but critical Senate-only procedural constraint on tax legislation passed via reconciliation that bars “extraneous provisions.” Does the bill meet the test? See below.
Happy Veterans Day weekend, all…
What is the Byrd Rule and how does the Senate version change the House bill to make the Senate legislation compliant with the Rule?
• Reconciliation: Republicans are using the reconciliation process to move their tax reform bill. Reconciliation allows legislation to pass with a simple majority, curtailing the ability to filibuster or offer “extraneous” amendments. Debate time is limited and allotted on a bipartisan basis. Reconciliation was originally intended to put up roadblocks to bills increasing the deficit. The recently-passed Budget Resolution instructions permit a $1.5 trillion deficit increase within a ten year “budget window” of FY 18-27.
• Byrd Rule: The Byrd Rule creates points of order (the right to raise objections that effectively defeat a bill procedurally) against extraneous provisions during reconciliation. If a Parliamentarian’s ruling sustains a point of order, the subject matter at hand is deemed out of order for the underlying bill.
To waive the Byrd Rule or sustain an appeal of the chair’s ruling, three-fifths of the Senate must to vote to do so. This is currently unlikely.
• Extraneous Provisions: The Byrd Rule, Section 313 of the Congressional Budget and Impoundment Control Act of 1974 contains six definitions of such an extraneous provision:
— It does not produce a change in outlays or revenues or a change in the terms and conditions under which outlays are made or revenues are collected;
— It produces an outlay increase or revenue decrease when the instructed committee is not in compliance with its instructions;
— It is outside the jurisdiction of the committee that submitted the title or provision for inclusion in the reconciliation measure;
— It produces a change in outlays or revenues which is merely incidental to the non-budgetary components of the provision;
— It would increase the deficit for a fiscal year beyond the “budget window” covered by the reconciliation measure, in this case, FY28 or beyond; or,
— It changes Social Security.
The fifth definition, bolded above, is most relevant for the Chairman Hatch’s purposes. To what extent do various parts of the Senate bill differ from its counterpart in the House bill to meet this Byrd Rule requirement? Do they, in fact?
Individual Tax Changes
• Brackets unchanged from current law: Instead of the four brackets proposed in the House bill, the Senate counterpart retains the seven brackets in current tax code. It does lower these brackets — including a 4.6 percent cut to the top rate. This cut would obviously lead to lower revenue collection, making compliance with the Byrd Rule a matter of off-setting revenues raised elsewhere in the bill.
• Estate Tax cut, not eliminated: The Senate version is a bit less regressive in terms of the Estate Tax. The House bill fully repealed the Estate Tax; instead the Senate version just simply weakens the tax by doubling the current exemption level to $11 million, bringing in more revenue than the bill by expanding (by $50) the Child Tax Credit. But this is a regressive policy in equity’s clothes. The major change is that the credit only begins to phase out at the million dollar income level as opposed to the $110,000 current level. The true help for poor families with children would have to come through the rumored change in “refundability” of the tax credit to make sure all families in need receive the financial assistance they need. Instead, the threshold to start receiving benefits is only lowered by $500 and still phases it in slowly for those poor families.
Corporate Tax Provisions
The corporate taxation titles of the Senate tax bill were clearly crafted with the Byrd Rule in mind.
• Corporate Rate Reduction: Like the House bill, the Senate’s tax proposal slashes the corporate tax rate to 20 percent. Unlike the House bill (and over President Trump’s objections), the Senate delays this reduction for a year, until January 2019. Delaying the corporate rate cut stands to save $100 billion or more. News of the delay sent markets spiraling 200 points in an hour on Thursday.
• Pass-Through Entities: Pass-throughs are generally small businesses, LLC’s, Sub S corporations, and partnerships that are taxed only on individual returns. The Senate and House bills also differ on the treatment of pass-through entities. The House bill stuck to the so-called 70-30 rule under which a pass-through filer would be required to count 70 percent of their income as wages (taxed at the individual rate) and 30 percent as business income, taxed at the 25 percent pass-through rate.
The Senate bill, on the other hand, provides pass-through entities with a 17.4 percent deduction for non-wage income. In an effort to limit tax avoidance, service businesses with taxable incomes greater than $150,000 for joint filers and $75,000 for single filers would not have access to this deduction.
• Carried Interest: The House bill would limit the carried interest tax break by tripling the length of time an asset would have to be held to qualify for the capital gains rate. Specifics have yet to emerge on the Senate’s treatment of the carried interest loophole. Sen. Grassley indicated the issue will be handled during next week’s amendment process, and rumor has it that the Senate might be aiming to eliminate the carried interest break entirely. Repealing the carried interest loophole entirely would raise around $20 billion over a decade.
As the Senate also aims to force multinationals to pay up in its proposal for a territorial tax system, key differences arise between its pursuit of repatriation and the House approach.
In the Senate, multinationals would be taxed at 10 percent for cash holdings and 5 percent for non-cash holdings overseas. When compared to the House, the rates are 14 percent and 7 percent respectively. Such a concession ought to please a few companies.
The Senate’s stance on intellectual property, however, may upset a few. Ways and Means Chairman Brady favored a provision in the House that would include a 20 percent excise tax on goods, services, licenses, and patents sold by multinationals to their foreign subsidiaries — the goal being to target tax avoidance attained by shifting profits overseas. Companies like Apple were nonplussed.
The Senate tax plan would only apply this tax to copyrights, patents, and other forms of intellectual property, excluding goods and services. This would be a major hit to pharmaceutical and technological companies. Furthermore, the provision includes a “stick and carrot” approach for multinationals. Income from these intangible assets would be taxed at 10 percent if the firm is U.S.-based, and at 12.5 percent if it is derived from a foreign affiliate.
Embracing the new tax on multinationals’ foreign profits will not solve the Senate’s issue of resolving the added debt within the ten-year budget window. In fact, this gain in revenue may indeed be offset by the tax of just 10 percent on domestic income from intangible assets, which is much lower than the 20 percent corporate rate that would apply otherwise.
The Senate Finance Committee plans to mark up its version of the Tax Cut and Jobs Act next Monday, November 13. We will find out if any amendments or points of order are offered on extraneous matters under the Byrd Rule. The Senate bill would appear to violate the Byrd rule prohibition against raising the deficit in FY 28 or later, but not by enough that it can’t be remedied. A score of the House bill has yet to be revealed. The House version would also have violated the Byrd rule by increasing the deficit in 2028 and beyond.
Both these bills remain ominous to progressives’ tax reform vision, varying from each other in qualitative analysis of how bad each is, but virtually the same in terms of the quantitative damage ensured to be inflicted upon the middle-class and lower-income taxpayer. Reconciliation may make it easier for these to pass on the floor of the House or the Senate, but at the end of the day they would (and should) not pass in normal order.