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Negotiators Poised for Pass-Through Battle: Tax Debate Update

Alexis Leondis
The U.S. Capitol building Photographer: Andrew Harrer/Bloomberg

House and Senate Republicans are working this week on compromise tax-overhaul legislation in an effort to send it to President Donald Trump by the end of the year. Here are the latest developments, updated throughout the day:

Negotiators Poised for Pass-Through Battle

Questions about how to tax pass-through businesses, such as partnerships and limited liability companies, are emerging as the thorniest issue facing House and Senate lawmakers who are set to begin meeting in a combined “conference committee.”

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President Donald Trump -- who himself has interests in roughly 500 pass-through entities, most of which are organized as LLCs -- has said he thinks the best of the House and Senate plans should be blended during what he called the conference committee’s “mixer.”

But it’s not that easy when it comes to the treatment of pass-through businesses, in part because of divergent approaches. The House would set a lower tax rate on the businesses’ income, while the Senate would allow for a significant deduction on that income.

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The House bill calls for lowering the top rate for pass-through business income to 25 percent from 39.6 percent and creates a still lower rate of 9 percent for businesses with the lowest earnings. It would apply to no more than the first $75,000 of net business income, but would be limited to businesses making no more than $150,000 total. The lower rate would phase out at higher incomes.

The House bill would restrict the 25 percent tax rate to just 30 percent of business owners’ income. The rest would be treated as wages. Or they could use a formula based on their level of capital investment to determine how much income would get the new rate.

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Critics have said the system runs counter to GOP leaders’ promises of simplicity.

In the Senate, demands from Republican Ron Johnson of Wisconsin and Steve Daines of Montana led tax writers to create a 23 percent deduction for pass-through owners. After the deduction, owners would pay tax at their individual income tax rates. The deduction would be limited for single pass-through owners with taxable income above $250,000 and for married couples with income above $500,000. And it would expire in 2026.

The Senate version has an edge in the negotiations because it’s simpler, according to two lawmakers familiar with the negotiations who asked not to be named because the discussions are sensitive.

“Some people understand the Senate bill a bit better,” said Representative Devin Nunes, a California Republican and a member of the conference committee, referring to the pass-through measure. “It’s easier, I think, for the average American to understand, so that’s an advantage of the Senate bill.”

Adopting the Senate provision in the final bill could face push back from House conservatives Mark Meadows of North Carolina and Jim Jordan of Ohio. The two met with senators to discuss pass-throughs earlier this week. Meadows, chairman of the influential House Freedom Caucus, said the Senate proposal “won’t work.”

GOP lawmakers are “making sure we take the best on the pass-though sides,” Ways and Means Chairman Kevin Brady, who’s overseeing the House-Senate conference committee, said Wednesday. “I think we can do better than both there.”

Aside from pass-throughs, House and Senate lawmakers also have to grapple with other potential sticking points, including:

  • the effective start date of a corporate rate cut
  • how to handle individual deductions for state and local taxes
  • whether to preserve or repeal the corporate and individual alternative minimum taxes
  • international tax provisions
  • settling on a top individual tax rate
  • whether to keep the estate tax
  • and specific terms of deductions for medical expenses, student loans and mortgage interest.

-- Erik Wasson, Kaustuv Basu, Laura Davison and Alex Ruoff

What to Watch on Thursday:

  • Keep an eye out for lawmakers or others to leak trial balloons about possible decisions on pass-through provisions, state and local tax deductions, the corporate alternative minimum tax, and other measures to try to gauge reactions as negotiations continue.

Here’s What Happened on Wednesday:

  • The Senate finished its debate on Wednesday evening for the motion to proceed to conference. Senate Majority Leader Mitch McConnell named eight Republican lawmakers to be part of the panel responsible for negotiating a final tax bill with House lawmakers.
  • Senate Finance Chairman Orrin Hatch said “there is a drive” to set the corporate rate at 22 percent instead of the 20 percent that Senate and House bills have proposed. Still, the Utah Republican said his preference is 20 percent, down from the current 35 percent level.
  • Republican lawmakers are discussing a compromise on state and local tax deductions that would allow taxpayers to deduct state income tax, House Ways and Means Chairman Kevin Brady said.
  • Under one proposal that’s being discussed, taxpayers could deduct both their state income tax and state and local property taxes up to a combined limit of $10,000, according to Representative Ryan Costello, a Pennsylvania Republican.
  • McConnell said he’s open to tweaking final tax legislation to appease lawmakers who want to let constituents deduct state income taxes.
  • Two House members from New Jersey -- Leonard Lance, a Republican, and Josh Gottheimer, a Democrat -- plan to submit a joint proposal to the conference committee that would maintain SALT in its entirety.

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