Five Big Sticking Points in the Republican Tax Plan

Updated on
  • A handful of House Republicans already declared opposition
  • Other quiet whispers of concern question pass-through rules

GOP's United Front on Taxes Masks Underlying Resistance

After a display of unity for the unveiling of an ambitious plan to slash individual and corporate taxes, some House Republicans began late Thursday to pick out the parts of the tax legislation they don’t like.

The ink was barely dry on the first draft when at least four Republicans declared they would vote against the bill in its current form. While the early opponents represent high-tax states that would get slammed by the plan’s elimination of state and local income-tax deductions, several other areas began to emerge as points of contention as Republicans sifted through the 429-page bill.

“I’m trying to get my arms around it,” Mark Sanford, a Republican from South Carolina, said Thursday night. He smiled and didn’t respond when asked if he would vote for it.

The House GOP leadership team asked members over a barbecue dinner Thursday to understand the whole package before passing judgment. They promised a tax calculator that Republican lawmakers could use to show their constituents exactly how much they would save under the new system.

“It is not about individual provisions. It is about modeling how it all fits together and explaining how the package works for their districts,” Representative Patrick McHenry, the deputy GOP vote-counter from North Carolina, said on his way into Thursday night’s meeting.

That logic seems to be working with some members, even those who regularly defy party leadership like Dave Brat of Virginia. He heralded the tax plan as pro-growth and said as it’s written now, “leadership did a great job with this thing.” He said he plans to vote for it.

‘Lobbyists Are Storming’

President Donald Trump had his own warning for House Republicans Thursday night, tweeting, “The lobbyists are storming Capital Hill, but the Republicans will hold strong and do what is right for America!”

The draft bill presented Thursday is sure to look quite different as it goes through the legislative process. Ways and Means Chairman Kevin Brady offered technical revisions Friday and said in a statement that he’ll propose substantive changes when the committee begins considering it Monday.

It’s unclear how long it will take the committee to approve the bill; markups can last for hours or days, as panel members debate and vote on amendments. Then the measure would be sent to the House floor, where it could undergo additional changes. Republicans have said they hope to pass the bill in the House before Thanksgiving.

Republican Representative Mike Bishop of Michigan said he anticipates numerous amendments will be added to the bill as the committee does its work. “We don’t want to be resistant to good ideas,” he said.

But any changes could open the floodgates to others, and even slight tweaks could add to the legislation’s deficit-busting math.

Here are five of the biggest early sticking points.

State and Local Taxes

The provision to scrap most deductions for state and local taxes has been the most fiercely contested so far. That’s especially true of House Republicans from New York and New Jersey, where such taxes are among the highest. The bill drafters offered a compromise by keeping the deduction for property taxes, though it would be capped at $10,000.

"There is much to like in the legislation but the proposed cap on deductibility of state and local taxes makes the bill unacceptable at this time," said Representative Leonard Lance. "Eliminating or rolling back state and local tax deductibility will hurt New Jersey’s hard-working middle-class families and our state economy."

Other Republicans saying they’ll vote against a bill that eliminates SALT deductions include Representatives Peter King of New York, Lee Zeldin of New York and Frank LoBiondo of New Jersey. But New York Republican Chris Collins said he’s satisfied with the compromise and will "enthusiastically" support the bill.

Given that Republicans can only lose only 22 votes and still pass the bill, holdouts in those blue-state delegations may need to be appeased if implacable opposition mounts in other factions of the party. But the provision is one of the GOP’s most significant revenue raisers to balance its proposed cuts, and removing it could make the legislation breach the maximum $1.5 trillion threshold for raising the nation’s debt.

Mortgage Interest Deduction

The concerns of Northeastern Republicans are exacerbated by the GOP’s proposed cap on the home mortgage interest deduction. Taxpayers would only be allowed to deduct interest on mortgages up to $500,000 for any new primary home purchase, down from $1 million. That figure isn’t indexed to inflation.

“Nobody knew that was in there. They kept that from us and I don’t appreciate that,” New Jersey Representative Thomas MacArthur told reporters, saying that the cap is a setback for the bill. He said Friday he’s on board with the $10,000 property-tax deduction cap and is focused on raising the mortgage cap and indexing it to inflation.

The issue for some lawmakers from Southern states, where the cost of living is lower, may be the proposed elimination of the deduction for vacation homes. Mark Meadows, the head of the conservative Freedom Caucus, said that the change would affect his North Carolina district where such second homes are common. He listed that portion of the bill as a concern, but not a "red line" that would cause him to vote against it.

The bill’s potential impact on homeowners has already sparked strong outside opposition. William Brown, president of the National Association of Realtors, said in a statement that the bill "appears to confirm many of our biggest concerns.” He argued that “eliminating or nullifying the tax incentives for home ownership puts home values and middle class homeowners at risk."

Republican Ways and Means member Mike Kelly of Pennsylvania said he expected a deal on interest deductibility benefiting car dealers to emerge during next week’s committee meeting.

Pass-Through Restrictions

Helping small businesses has been a constant theme of the Republican sales pitch for tax cuts. But there was significant concern from rank-and-file lawmakers that rules meant to limit abuse of a new 25 percent rate for companies that aren’t organized as "C" corporations could end up limiting the boon for small businesses.

The tax bill draft has two formulas available for these closely held firms, which are known as pass-throughs, as well as restrictions on what kinds of companies would qualify. 

The National Federation of Independent Business said Thursday that it couldn’t support the current draft, saying its provisions wouldn’t provide enough help to small businesses. The nonpartisan Tax Foundation said the pass-through rules may not have the intended effect. 

"Even with these guardrails, the provision is likely to create opportunities for tax arbitrage, and it adds complexity to the tax code,” the group said in a statement.

Republican Francis Rooney of Florida has previously expressed concern about the issue, along with Sanford and Meadows. Even Brat, who praised the overall bill, said the pass-through provision still needed some work.

“That’s my concern,” Brat said of a rule that would restrict income that can be filed at business and individual rates. “We need to make sure we fine tune that and get it right.”

Interest Deductibility

The legislation would limit the corporate interest deduction at 30 percent of a company’s earnings before interest, tax, depreciation, and amortization. That would work for a lot of businesses, Texas Representative Kenny Marchant said, but the Ways and Means Committee is looking at a carve-out for high-inventory, low-margin businesses, such as car and tractor dealers, he said.

Tom Reed, a New York Republican and member of the Ways and Means panel, acknowledged that the proposed change has caused concern.

“It’s a major expense to a lot of companies, and businesses across America,” he said. “I think what we landed on is something that’s a reasonable target.”

Senator John Thune of South Dakota, the No. 3 Republican, has said that corporate interest deductibility is important to many businesses and that’ll be a consideration for the Senate when it crafts its bill. Senate GOP opposition killed an original proposal by Speaker Paul Ryan to eliminate interest deductions entirely for the purpose of allowing full and immediate expensing, which raised hackles from debt-reliant companies.

‘Backdoor BAT’

A fight could arise over a proposed 20 percent excise tax on payments, including royalty payments, that U.S. companies make to their offshore affiliates. That provision is aimed at preventing companies from shifting their U.S. profits to offshore units in countries with lower tax rates.

Americans for Prosperity, an influential conservative group backed by billionaire industrialists Charles and David Koch, is criticizing the proposal, saying it could increase consumer prices.

AFP sought to compare the provision to the much-reviled “border adjusted tax,” or BAT, which Ryan pushed before a wave of opposition from retailers and others forced him to drop the concept last summer. AFP opposed that provision as well, saying it would raise prices.

On Thursday morning, the group was already announcing its opposition to the excise tax -- and labeling it a “backdoor BAT” -- before the tax bill was released.

“The concern is this becomes a consumer tax on common products,” Levi Russell, an AFP spokesman, said in an email.

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