By David Morgan
WASHINGTON, Dec 4 (Reuters) - U.S. Republicans in Congress are grappling with a thorny question about corporate taxes as they work to reconcile competing tax bills from the Senate and House of Representatives into a unified measure that they hope President Donald Trump will sign into law before the end of the year.
The Senate bill that squeaked through on a 51-49 vote last week jettisoned a long-held Republican goal of repealing the corporate alternative minimum tax (AMT) to help pay for last-minute deals that secured the Republican votes for passage.
That puts Senate Republicans on a collision course with Republicans in the House of Representatives, whose own tax bill repeals the corporate AMT and who are already calling for the tax to be eliminated in final legislation.
House and Senate Republicans also face potential sticking points over how their bills treat so-called pass-through enterprises, top earners, the estate tax on inheritances and international tax policy for corporations.
But the corporate AMT could be the biggest challenge, because removing it could require lawmakers to cover a $40 billion revenue loss over a decade, possibly by scaling back their plan to cut the corporate income tax rate to 20 percent from 35 percent.
The 20 percent corporate AMT is an alternative to the regular corporate income tax in computing taxes owed. It is designed to limit the ability of corporations to reduce their tax bills through various deductions and credits, such as a credit for research and development that is especially popular with Silicon Valley technology companies.
Corporations must compute taxes using both methods and then pay whichever rate is higher.
With the top corporate rate now at 35 percent, few wind up paying the AMT. Because both the House and the Senate bills would reduce the corporate tax rate to 20 percent, the same as the corporate AMT, there is concern that corporations would not be able to use the R&D credit.
"I think that has to be eliminated," House Republican leader Kevin McCarthy of California said of the corporate AMT in a CNBC interview on Monday.
The House voted 222-192 on Monday to go to conference with the Senate on tax legislation, setting up formal negotiations that could take weeks to complete. A similar Senate vote could come later this week.
The decision to retain the corporate AMT in the Senate bill helped keep the legislation's overall revenue loss within an agreed-upon limit of $1.5 trillion.
"There would need to be some sort of alternative to raise that revenue and there isn't a lot of latitude to make further trades," said Jared Walczak, senior policy analyst at the nonpartisan Tax Foundation, a Washington think tank.
Senator John Cornyn, the No. 2 Republican in the Senate called that "the $64,000 question.
"The money's got to come from somewhere," Cornyn said. "That's one of the things we'll have to explore if (House Republicans) want to make some changes."
Trump has already signaled flexibility on the corporate tax rate, saying on Saturday that it could end up at 22 percent rather than 20 percent in both bills. His comments could help justify a bump up in corporate taxes to cover the cost of eliminating the corporate AMT.
But Republicans worry that increasing the corporate income tax rate above 20 percent could make the U.S. economy less attractive in a global marketplace where national tax rates have fallen.
"I would hope that we would not change the corporate rate," Cornyn said. "I hope we don't undermine our own message." (Reporting by David Morgan; Additional reporting by Makini Brice; Editing by Caren Bohan and Leslie Adler)